Neoconservatives Wildly Misrepresent Iran (What Else Is New?)

On today's Washington Post editorial page, Marc Reuel Gerecht, formerly of the CIA, and Mark Dubowitz, current Director of the Foundation for Defense of Democracies and its Iran Energy Project (where Gerecht now works also), have a column titled, "In Iran Talks, one side ready to bend," neatly timed to coincide with the beginning of negotiations between Iran and the Group of Six, and just after Iran announced a willingness to open to outside inspections some previously blocked sites and programs.  The authors argue that the West, European countries particularly, will be looking for the least excuse to relax the economic sanctions against Iran for only stopping their uranium enrichment to 20% activities.  They argue that the sanctions should be maintained to "crater" the Iranian economy so that even enrichment to 5% (far below the 90+% needed for nuclear weapons, but needed for their domestic electricty producing reactors) is shut down as well.

Quite aside from the authors not noticing the existence of the Iranian domestic civilian reactors needing the 5% enriched uranium (with them presumably wanting those reactors shut down as well), or that the Iranian nuclear program dates back to the pro-US regime of the Shah, they make several simply outrageously incorrect claims.  The clearest is a claim that Supreme Leader Ali Khamenei has been actively supporting a nuclear weapons program since "when it was still covert" in the mid-1980s, before he became the Vilayat-el-faqih (Supreme Jurisprudent), although Rafsanjani is identified as the "true father" of the nuclear weapons program.  Quite aside from the fact that what program they had was shut down about a decade ago, this ignores that after that shutdown and also very recently and publicly, Khamenei has issued religious edicts, fatwas, against nuclear weapons.  That he had done so earlier was widely ignored in the US media, with only people like Juan Cole reporting on it.  This most recent utterance did get public attention, however, presumably because it coincided with the decision to move to this round of negotiations.  Most of the reports failed to mention that this was nothing new on Khamenei's part.

The other is a claim, based on quoting Anthony Cordesman, to the effect that pursuing nuclear weapons has been the "main focus of Iran's military strategy for the past quarter of a century."  This claim also runs into the same problem already mentioned above, that Iran gave up its half-baked pursuit of nuclear weapons a decade ago, with its Commander-in-Chief Khamenei issuing his fatwa against nuclear weapons not too long thereafter.  Of course, for much of this more recent period, it was fashionable to ignore Khamenei completely and focus on President Ahmadinejad, who conveniently issued periodic semi-insane remarks that could be focused on.  However, as it has become increasingly clear more recently that he is not in charge at all (and never was of military programs) and Khamenei is, we now have this weird drumbeat of focusing on Khamenei and actually presenting the beaten down Ahmadinejad as a "reformer."  I cannot begin to describe how ridiculous and misleading all this is, but this particular column is really far out there in terms of its egregious and hysterical misrepresentations of basic facts.

Global trends in an era of diminishing returns

In 1996, Lester Thurow's book entitled 'The Future of Capitalism' was published.  I found his book a very interesting read in the context of the global financial crisis which is continuing to unfold since 2007.  On pages 8-10 Thurow describes, what he terms as, 'five economic tectonic plates' crashing together and providing an ominous trend that helps to foretell capitalism's crisis.  They are:

1. The end of Communism (leading to an increase of one third of humanity operating under capitalism's umbrella, "with a very different set of criteria for success and failure..."
2. Technological shift to an era dominated by manmade brainpower industries which "don't have natural predetermined homes.  They are geographically free - capable of being located anywhere on the face of the earth..."
3. A demography never before seen.  "Population is booming in the poorest countries [leading to] "the pull of higher standards of living abroad" where "unskilled labour is not needed". Thurow also mentions the development of "a new 'class' of human beings - a very large group of elderly, relatively affluent people, most of whom do not work, and who are dependent upon government social welfare payments for much of their income."
4. A global economy.  "Shifts in technology, transportation and communications are creating a world where anything can be made anywhere on the face of the earth.....Thurow notes that this creates a 'disconnect' between "global business firms with a worldview" and national governments.
5. An era where there is no dominant economic, political or military power.  How (Thurow asks) is the economic world to be designed or organised in a multipolar world?

By looking at the trends outlined above one is able to predict a few other things occuring simultaneously in the global economy.  With the very large increase in the world's workforce it is probable that the global unemployment would rise significantly, and wages would decline.  The deepening of globalisation would, in turn, lead to difficulties for national governments to secure a big enough tax (revenue) base from the incomes of dominant corporations (who can flit money across national boundaries at the tap of the keyboard.) I would also expect financial regulation to become almost impossible under the laissez-faire mentality created by the emergence of powerful global (self-interested) corporate giants.

Indeed, on page one of Thurow's book he writes: "In all of Western Europe not one net new job was created from 1973 to 1994."  And the International Labor Organisation reported a few years back that in Europe between 1970 and 2005 the financial sectors share of corporate profits climbed from 21% to 42% [1].

But why are the trends that Thurow outlines above happening in the first instance? Have we entered an historical era of 'diminishing returns'?

It looks quite possible that, for decades now, global economic growth has actually coexisted with a steadily declining general standard of living. 

Brenda J Rosser, 23rd May 2012.

REFERENCES:

[1]  World of Work 2009.  Snapshot of the European Union

http://www.ilo.org/public/english/bureau/inst/download/eu_region.pdf

GDP Gap by End of 2013 if the Fiscal Cliff is Allowed to Occur

The Congressional Budget Office has considered the effect on real GDP growth in 2013 under two alternative fiscal policies:

Under current law, the federal budget deficit will fall dramatically between 2012 and 2013 owing to scheduled increases in taxes and, to a lesser extent, scheduled reductions in spending—a development that some observers have referred to as a “fiscal cliff.” Today CBO released an analysis of the economic effects of that fiscal restraint. Under those fiscal conditions, growth in real (inflation-adjusted) gross domestic product (GDP) in calendar year 2013 will be just 0.5 percent, CBO expects—with the economy projected to contract at an annual rate of 1.3 percent in the first half of the year and expand at an annual rate of 2.3 percent in the second half. Given the pattern of past recessions as identified by the National Bureau of Economic Research, such a contraction in output in the first half of 2013 would probably be judged to be a recession. If lawmakers changed fiscal policy in late 2012 to remove or offset all of the policies that are scheduled to reduce the federal budget deficit by 5.1 percent of GDP between calendar years 2012 and 2013, the growth of real GDP in calendar year 2013 would lie in a broad range around 4.4 percent, CBO estimates, well above the 0.5 percent projected for 2013 under current law.

Using the CBO estimate of potential GDP, the gap as of 2012QI was 5.4%. CBO also expects GDP to grow by a mere 2% during 2012, which would mean that the gap at year end would still be 5.3%. If policymakers allow the fiscal cliff to occur, this CBO forecast says that the gap will grow to 6.6% by the end of 2013. If policymakers avoided the fiscal cliff in such a way that GDP grew by 4.4%, however, the gap would fall to 3% by the end of 2013. While many economists might prefer some fiscal stimulus so as to close the GDP gap even faster, maybe our best hope given this dysfunctional Congress is that they don’t impose even more austerity.

Austerity by Magic Asterisk

Mercifully the Speaker of the House’s oped was short. I’m trying but that’s the only kind thing I can find to say about it. Its growth by austerity theme is evident from the inception:

The American people continue to ask "where are the jobs?" and the overspending going on in Washington, D.C., is a big part of the reason why. Our national debt, which has grown significantly due to President Obama's failed "stimulus" policies, is a drain on our economy and a crushing burden on our kids and grandkids.

But did we expect Mr. Boehner to do anything other than praise the policies of Herbert Hoover? He wants to blame the President for the failure to reach any compromise on long-term fiscal responsibility but he proposes nothing in the way of specifics. In fact, he criticizes the President for considering tax increases. No wisdom on how to get us back to full employment and no courage on long-term fiscal responsibility. This is what the Republicans have as leadership? It is a wonder that USAToday wasted any of its space on this oped!

Does the Chamber of Commerce CEO Recall the S&L Crisis?

Tom Donohue has a similar view as Mitt Romney on the recent JPMorgan fiasco:

The first government to help the banks was George Washington, and ever since, every time they do it, they make usurious amounts of money. And the government has got tons of money back from everything they did through the TARP funds and now they were sort of a little chagrinned to say they’re making a lot of money on the AIG deal.

And I thought taxpayers were out over $160 billion bailing out those S&Ls and commercial banks back in the 1980’s. Of course, the government did assist the US automobile sector and financially did OK with that deal. Funny thing – some folks like Mitt Romney thought that was a bad idea. I guess the Chamber of Commerce thinks lemon socialism is fine and dandy for the financial sector even without regulation. Ahem!

Will The Student Debt Burden Depress The US Housing Market For The Foreseeable Future?

There is every reason to believe so.  On the one hand, after years of mortgages being granted without down payments, those have been reimposed along with much stricter standards regarding analysis of credit worthiness of mortgage borrowers in the wake of the collapse of the housing bubble.  However, the student debt burden has now reached a record high in excess of $1 trillion total, with many recent grads unable to get jobs that will allow them to begin dealing with their accumulated burdens in a serious way, and even some of their parents and grandparents burdened with paying these.  These burdens are especially great for the most recent grads, who are very unlikely to be able to buy houses for the foreseeable future.

It is worth noting how alone the US is in having this level student debt burden.  It is clearly the result of our having by far the highest levels of tuition of any country in the world, substantially driven in more recent years by major cutbacks in state aid in for public colleges and universities.  In many nations college education remains free, and in most others the tuitions are all but nominal.  The small number with more substantial tuitions includes Austria, Netherlands, Chile, South Africa, and especially Canada, the only one that approaches the US level at all.  Canada does have a student debt problem, but it comes nowhere near that of the US, with current aggregate student debt amounting to $20 billion.  Yes, Canada is only about a tenth of the US size in population, but that still leaves the per capita student debt burden there at less than a quarter of that in the US. 

So, the US has a uniquely substantial drag around its younger population that will make large portions of its younger population unable to buy homes for a long time to come.  Forget any serious "recovery" of housing prices anywhere in the US anytime soon.

Ah, For the Ignorance that Is Ignorant of Itself

Catherine Rampell quotes Daniel Webster, who sponsored a bill to eliminate the American Community Survey, which was passed by the full House of Representatives: “We’re spending $70 per person to fill this out. That’s just not cost effective, especially since in the end this is not a scientific survey. It’s a random survey.”

Metaphorically Speaking

Robert Schiller opens his New York Times column today on a promising note, pointing out the power that metaphors have over our thinking about economics.  A particularly nefarious motif is “belt-tightening”, conjuring up the idea that running an economy is like managing the finances of a family.  When family income falls, under normal circumstances a proper response is to cut spending too: live within your means.  It’s a  misleading guide to macroeconomics, however, since it takes the outside world, the place where our money comes from, as given and looks only at how we can respond to it.

Unfortunately, Schiller’s alternative, while fine for some purposes, also misses the point.  He suggests “a winter on the family farm”, where, while when the land is covered in snow, it makes sense to invest time in repairing old equipment, investing in new methods, and so on.  He’s right of course, except that his metaphor also sidesteps macro.  It too takes “winter” as an exogenous force and fails to illuminate how economic winters are created by the behavior of the farmers themselves.

I’ve been looking for the right metaphor, and I don’t have it yet, but I do have a story.  It is the farm family version of the baby sitting coop, sort of.  Apparently we all have peasant roots and respond better to yarns about hardscrabble agriculturalists than yuppies looking for a place to park their babies.

It goes like this: there is a far-off land with just two farmers and their families.  One grows wheat, the other raises cows for milking.  Each produces for itself and sells the rest to the other farmer.  One day, the dairy farmer decides to try out a low-carb diet and reduces her family’s wheat purchase.  The wheat farmer’s income drops, and his family holds an emergency meeting to figure out what to do about it.  “Our income is down,” he says, “and we have no alternative but to tighten our belt.  This means we have to cut down on milk.”  And so they do.  But then income falls over at the dairy farm, and they too hold a meeting, and the result is even less wheat buying.  And so it goes, around and around, until neither family has any income at all, and everyone’s diet is terrible.

Yes, I have left out prices, and there is nothing about expectations.  It’s just a story, and the point is to make as vivid as possible the core macroeconomic insight that spending is income—that they are two sides of exactly the same thing.  Every dollar or euro the government spends is income for someone, and if income is dropping and the government responds by cutting its spending, that dries up the flow of income even more.

Nothing profound here, and I’m sure most readers are asking, why bother?  The answer is that none of us has time to book up on every subject of importance, and we need metaphors and simple stories to help us get through the rest.  That’s how it is for most people and economics.  How can we create potent little macroeconomic memes and send them out into the world where they can do some good?

An Open Letter to Alexis Tsipras

I have just finished reading the interview with you that was published in this morning’s New York Times.  I assume it is accurate, even if the questions were not always the ones I would have asked.  I was especially struck by this comment from the reporter:

Although he conceded that the Greek state had “significant dysfunctionalities and a need for deep structural changes,” he did not offer specifics beyond faulting the Socialists and center-right New Democracy for building up a jobs-for-votes system that helped Greece’s public debt balloon.

The rest of the interview was about Greece and the EU, Greece and the ECB, Greece and Germany, and so on.  Your party was portrayed as focusing its strategy on linking up with dissidents across the Eurozone who want to end the fixation on protecting creditors and enforcing austerity.

Fine: I can understand why you would do this.  Greece needs friends, and a regime change in Brussels and Frankfurt could do a world of good.  But if I were you I wouldn’t put to much faith in this approach.

Greece is now seen as a pariah state across the rest of Europe.  You can blame the leaders of Pasok and New Democracy for this: they joined into the charade of “bailouts”, giving the impression to ordinary people elsewhere (and especially in Germany) that feckless Greeks were subsisting off the handouts of the others, the honest, hardworking taxpayers north of the Alps.  None of these politicians pointed out that it was not Greece that was on the receiving end of these funds but banks and other private investors whose only goal was to get as much of their wealth out of the country as possible.  That game succeeded, and now it is only working class Greeks who will suffer if the country returns to the drachma and all domestic financial assets are radically devalued.  Meanwhile, bailout fatigue has settled on the rest of the continent, since the myth has been upheld that the very Greeks who are most at risk are the ones who benefitted.

In short, while it is necessary to fight for support throughout Europe for a zone-wide policy shift, I would place a lot more emphasis on domestic change—the goal Greece can pursue with or without Europe’s help.

The dysfunctionalities you briefly referred to are class issues, and this should be emphasized at every opportunity.

1. The tax revenue capacity of the Greek state is a class issue.  This is partly a matter of who pays and who doesn’t, although many small business owners who are hardly members of the elite also participate in tax avoidance.  The real issue, however is that working class Greeks  depend on the ability of the state to collect taxes in order to live a civilized life, to enjoy the protection of social insurance and public services without which capitalism would be utterly intolerable.  The rich don’t need this and are content to live in a society with a small, threadbare state.  We have this conflict in the US too, and its class dimension is perfectly obvious.

2. The patronage system of politics and economics is deeply injurious to the working class.  This is often disguised at the individual level, since each recipient of a job or the expedited consideration of a claim or help with queue-jumping is grateful for what he or she gets.  Such benefits, however, are purchased at the cost of submission.  The beneficiary must provide loyalty to the big shot who hands out the favors.  Each time this exchange of benefits for loyalty occurs, it reproduces the hierarchy that tells you, “They are above and I am below.”  It is a humiliation.  OK, I don’t know exactly how patronage is experienced in Greece, but such systems are known all over the world (I’ve personally experienced aspects of it in the US), and the story is more or less the same.  It is a matter of shifting from a system of favors to a system of rights.

My point is that focusing on Europe is a trap.  It buys into the narrative that the political choices in Greece are fundamentally about how to respond to the demands of the troika.  If cracking down on tax cheats and creating a truly independent civil service are seen as demands from their creditors, most Greeks will understandably oppose them, quietly if not openly.  But they are not primarily about forking over money to the rest of Europe but social justice in Greece itself.  They are class issues and should be fought for no matter what happens on the financial front.

There are two sides to the democratic deficit of the EU.  One is the lack of democracy at the level of Europe that has permitted so-called technocrats, which is to say acolytes of neoliberalism who put the interests of finance ahead of all others, to impose their will on civil society.  The other is the removal of essential economic issues from national political debate, because they have been superceded by “Europe”.  On these issues there is democracy neither up there nor down here.  I don’t know what Greece can do for the effort to expand the democratic political space in the EU, but it can do a lot for democracy in Greece by attacking a system founded on privilege.

The Boogeyman Of The Debt Ceiling Crisis Raises Its Head

Earlier this week House Speaker John Boehner raised last summer's boogeyman of a crisis over rasing the US debt ceiling again.  That particular fun and games led to a debt downgrade for the US and a slowing of many markets and the US economy, and as the only way for the GOP to win the upcoming presidential election is for there to be a significant slowdown of the US economy, well, with the rest of the world's economy slowing down, maybe a raising of last summer's boogeyman might just do the trick.

Maybe it will, but probably not, although of course the US economy is slowing and will probably slow some more,  making for a nicely close race coming up, oh joy.  But Boehner's particular scare probably will not play.  The deal made last summer appears to still be in play on this matter.  The official debt ceiling might be breached prior to the election date in early November, but the US Treasury will be able to stretch things out for a few months as last year with its usual tricks.  The "fall off a cliff" fiscal deal cut last summer to end that round of debt crisis will kick in before the debt ceiling is seriously hit.  The jockeying and efforts to cut that short before it arrives is already going on in a major way.

Part of that involves a reported effort by Boehner to put up for votes four different budgets.  One is Obama's official budget.  This one will die easily with possibly zero votes in favor it, given its details.  All such presidential budgets are always DOA and never voted on as such.  This will simply be for a show to embarrass O, although it will not make any impression.  But then neither will the other three, one of which will be Rand Paul's and the even more radical Mike Lee's, both of which massively cut wildly popular programs while engaging in massive tax cuts in the name of balancing budgets (I am unsure of the details of the fourth, although I gather it is another GOP "cut taxes and cut social safety nets" one that will encounter death in the Senate, even if it passes the House).

So, in anticipation of the game that will be played after November, irrespective of the outcome of the election, I suggest that Obama seriously consider what was strongly proposed by many of us last summer, and has been long on the table, proposed even as early as during the Reagan presidency by his then adviser, Bruce Bartlett (and still supported by him): repudiation of the debt ceiling limit as unconstitutional (14th Amendment, if not others).  After the election, Obama can pull it off, and this move by Boehner simply reminds all of us how ridiculous this whole debate is and how this boogeyman needs to have a stake driven into its heart so that it goes to the grave for good.

Just to remind everybody of some basic facts.  1)  The US is the only nation in world history to enact a nominal debt ceiling. 2)  The Constitution mandates the Congress with the approval of the President to pass a budget whose bills must then be paid for.  3)  The debt ceiling is thus simply an extra imposition on top of this mandated responsibility that has never served any other than a symbolic purpose since it was first imposed in 1917, four years after the income tax amendment was approved, and threatens to have the US violate its contracts.  4)  Until last year it was always raised with only minimal questioning because it was obvious that it had to be done as a matter of "good government."  5)  Finally last year, lunatics entered the Congress uninterested in "good government," so the essential stupidity of this nearly-a-century-old law has been exposed in the debt downgrade of last year as lunacy, now possibly becoming an annual ritual in the face of filibustered gridlock.  6)  So, the beast must be killed most expeditiously, and the sooner the better.  This upcoming post-election negotiation will be the moment to do it, and Obama is the man to do it, I dearly hope.

Romney: JPMorgan Loss – Just the Way America Works

The Republican’s candidate for the Presidency on that JP Morgan loss:

this was not a loss to the taxpayers of America. This was a loss to shareholders and owners of JPMorgan and that’s the way America works Some people experienced a loss in this case because of a bad decision. By the way, there was someone who made a gain. The $2 billion JPMorgan lost someone else gained.

So what’s the fuss? After all – shareholder value remains at $135 billion. Never mind this little drop in their stock price. I’m speechless!

The Problem with the Eurozone’s Throw-Greece-from-the-Train Plan Is that its Timing Can’t Be Controlled

There is no democratic deficit in Greece: its people have clearly indicated they want to do two things, clean the slate by defaulting on their debts and staying within the Eurozone.  This is seen as unacceptable in Brussels and Frankfurt, and Greeks are supposed to understand that if they choose the first they will lose the second.

Alas, there is no legal procedure by which Greece can be expelled from the EZ; therefore the strategy has to be one of making retention of the euro so ruinous for Greeks that they will exit on their own volition.  The mechanism is the Target system through which euros are transferred from one national central bank to another.

The idea is this: when funding from the troika is cut off after a default, the Greek government will lack the resources to backstop its banking system.  Moreover, euro transfers via Target will be cut off.  Greek depositors who try to withdraw their funds will be told, sorry, but the cupboard is quite bare.  This will ignite a banking meltdown, and the only way out for Athens will be to redenominate financial liabilities in a new currency they can supply.  Whether they call it a drachma is up to them.

Clever, huh?  The only hitch is that, now that the game plan is becoming clear, rational Greeks are not choosing to wait for an EZ attack before withdrawing their funds from Greek banks and transferring them somewhere, anywhere, else.  There is a gradually accelerating bank run taking place which is likely to reach criticality before a Greek-EZ policy showdown can take place.

There is a broader lesson here.  By threatening to choke the Greek banking system, the EZ implicitly threatens to do the same for Spain or even Italy.  They can say otherwise, but why should depositors in shaky peripheral banks believe them?  Withholding euros from peripheral banking systems is a gun that goes off before it is fired.  Simply brandishing this weapon is causing havoc and speeding the demise of the entire zone.

Better to put the gun away and do what should have been done all along: have the ECB assume the lender of last resort function for all EZ banks, with centralized financing of deposit insurance in particular.  Don’t use the threat of a financial panic as a policy tool.

Greek Reforms

The news sources I have access to present Greek politics entirely in relation to austerity: will Greece have a government that continues to adhere to the troika’s austerity mandate (until the money runs out), or will they repudiate it and risk ejection from the EZ?  Momentous stuff, but what about domestic reform?

Looking in from the outside, it seems to me that two reforms are absolutely essential, no matter what happens with the euro.  First, the government needs to have real tax collection capacity, particularly over professionals and businesses.  Without the ability to raise revenues, the essential pubic goods that most Greeks depend on—health, education, social insurance—will be unaffordable.  Periodic cash infusions from outside the country obscure the real problem, that Greece has not been able to call on the resources of Greeks.  At its core, of course, this is a class issue.

Second, Greece needs an autonomous civil service.  All but the very top positions in the public sector should be under civil service protection, and that includes key personnel functions: hiring, promoting and rewarding civil servants.  Contra the claims of the troika, ironclad tenure for civil servants is essential; they should not feel that their jobs are at risk if they displease a political boss.  Enforcement of civil service protection should be lodged, as much as possible, within the system itself.  The goal is to break up the patronage networks that have corrupted Greek politics and economics, to make political payoffs, which cannot be ended entirely in Greece or anywhere else, the exception rather than the system.  It is also difficult to see how the tax collection problem can be addressed without transforming public service.

Perhaps these items are already on the agenda of the left parties.  Again, coverage in my neck of the woods is limited, and nothing I am saying is particularly profound.  I hope reform is seen as just as important as resistance to austerity; if Greece is tossed from the EZ, reform will be that much more vital.

One nice feature of the sort of reform program I’ve sketched is that it puts the rhetoric of the troika to the test.  They say they want reform too.  But are they interested only in smashing the organization, solidarity and living standards of ordinary Greeks?  It would be nice to see how they would respond to the real thing.

The Main Point

Macroeconomics is complicated and political economy is devilish, so it is easy to get lost in the details.  From time to time, it’s good to come up for air—to remember what the fundamental issue is.  In a way, the debate over structural versus cyclical factors invites us to do just that.

Suppose the current recession/depression is mainly structural.  Suppose it is due to an immense misallocation of capital and labor, a failure to foresee what our economy would really demand in the years ahead.  According to this story, we have trained too many masons and anthropologists and invested in too many building cranes and liberal arts colleges, and it will take years to shift our human and produced resources to more valuable pursuits.  (Actually, I think there continues to be an enormous misallocation of investment, but this will become apparent only when the threat of global warming is taken seriously.)  If the structuralist story is right, the ongoing slump is necessary and unavoidable and will end only when we have fashioned the resources for producing the right stuff.

If the cyclical story is predominately true, however, we have neither the wrong people nor the wrong capital stock.  We have all the ingredients it takes to have a vibrant economy that can fully employ our populations and generate a standard of living that surpasses what we had in the past and that keeps growing further.  But think about it: if we have the wherewithal to resume prosperity, what holds us back?  And why should rational people accept any excuses for policies that delay it?

Repeat: we have everything we need, right now, to restart our economies.  All the unemployment, the hardship, the lost opportunities are unnecessary.  That’s the main point.

The secondary point is about the why.  There are ultimately two reasons why economies like ours get stuck in a cyclical rut.  The first is that there is a reinforcing cycle of insufficient demand and insufficient investment.  This is where standard countercyclical policy comes in: through fiscal deficits the government increases demand on its own initiative, and through monetary easing an impetus is added to investment.  We are near the limit of what easing can do (diminishing returns to the QE’s), but not anywhere near the limit of fiscal expansion.

The second reason arises in balance sheet recessions: too much private borrowing has taken place, debtors find it difficult to sustain debt service, and both debtors and creditors retrench.  In this case, which is ours, the essential problem is that fulfillment of claims on wealth—both credit claims and equity claims on debt-related assets—interferes with the conditions required for restarting growth.  In other words, the shadow of past wealth creation is depriving new wealth creation of sunlight.  While respecting wealth claims is desirable during normal times, since it supports long-term planning, there come episodes in which a choice must be made between the past and the future.  This is such a time.  Wealth claims need to be trimmed, quickly and sufficiently, in order to reduce leverage and permit economies to return to growth.  We shouldn’t forget the main point, which is that economic growth produces the stuff of which real wealth is made, while satisfying the claims inherited from yesterday only allocates this stuff.  (And in a slumping economy the claims can’t be honored anyway.)

If you accept the cyclical story, and the evidence certainly weighs in its favor, you should not accept another month, much less year after year, of excuses for austerity.

Balancing the Budget with Tax Cuts and Defense Spending Increases

Charles Riley of CNNMoney has a must see graph showing how defense spending under Mitt Romney would compare to the current DOD baseline budget over the next decade. His title notes the spending over the next decade will exceed the baseline budget by more than $2 trillion. I like this:

Romney has proposed a slew of tax cuts, and plans to cap federal spending at 20% of GDP. But in both cases, the Romney campaign hasn't fully explained how those provisions will be paid for. The lack of detail means that Romney's claim of moving toward a balanced budget requires a great deal of trust.

But no one should trust Mitt Romney on fiscal matters. No one.