Sam Uretsky

Disregard Deficit Hawks

The Employment Policies Institute is spending an estimated $5 million warning us about the federal deficit and the risk of severe inflation. Their web site starts with the words “Who Is John Galt?”, invoking the philosophies of the novelist Ayn Rand, and warning that if the rest of us aren’t better behaved, the top 1% of taxpayers will go on strike.

The ad warns us “... Galt’s group refuses to continue to produce for a country that no longer rewards their hard work. In our own nation, if a debt crisis forces the government to raise taxes dramatically, the effect on our economic growth and productivity could be catastrophic.”

They warn that we should cut government spending and reduce the deficit so that the people who collected their bonuses from AIG and Merrill Lynch will continue doing whatever they’ve been doing. We’ll miss Lehman Brothers if it goes out of business. (It did? Oh!)

The director of the Employment Policies Institute is Richard Berman, a Washington lobbyist who, according to Citizens for Responsibility and Ethics in Washington, makes a good living setting up front groups for corporations, and opposing consumer safety and environmental legislation.

The warning that growing Federal deficits might cause inflation would be valid at another time, but right now the biggest risk is that somebody will listen to the message. The problem now is that more than our fair share of politicians are listening.

We’ve lived for several years with financial regulators who believe in the absolute truth a market economics. This is the misguided belief in Say’s Law, that markets will always find the right price for every commodity.

This is the Little Bo Peep school of economics, that when you’ve lost your sheep, the proper response is to leave them alone, and they’ll come home, wagging their tails behind them.

One of the best illustrations of the fallacy of this law took place during the Great Depression, when people were starving, literally, but because prices had dropped so severely, farmers couldn’t make a profit on their crops, and couldn’t afford to provide food.

More recently, we’ve had a situation where US Treasury notes were paying negative interest because, to many people, the most important thing was to preserve cash. The idea of efficient markets works most of the time, but when it fails, it fails in a big way. That’s when Keynesian economics takes over, or would if enough people were paying attention.

John Maynard Keynes simply said that you can’t run an economy if nobody is spending money. He demonstrated that there are situations — the Great Depression was one and the current recession is another — when normal market forces fail, and the only alternative is government intervention, which may require deficit spending. Keynes wasn’t an advocate of deficits, but he recognized that you can’t have an economy if nobody is spending money, and if nobody else will do it, then the government has to step in.

In times of full employment, adding more money to the economy might cause inflation — but not now. The stock market lost 47% of its value between Sept. 30, 2007, and Dec. 2, 2008, a decline of about $11 trillion. Assets in retirement accounts reached $8.9 trillion on Sept. 30, 2007. By Aug. 31, 2009, retirement accounts had fallen $2.3 trillion.

While the drop in home values have varied by region, with some areas barely affected, nationally, home prices have dropped over 20% since they peaked in 2006. People have gone from a negative savings rate of 0.6% in 2006 to actual savings of about 6% in 2009, trying to replace loses in 401(k)s. Unemployment is nearly 10%, and because of the way that’s calculated, the real number, people out of work or underemployed, may be twice that level.

Money in the bank may be safe, thanks to the Federal Deposit Insurance program, but at less than 1% interest, it’s not a practical source of income. With these losses, consumer spending is likely to stay low. You can’t have inflation until people are willing to spend more for stuff, and that won’t be any time soon.

Unfortunately, too many people, including members of Congress, don’t get the idea and Mr. Berman’s Employment Policies Institute is spending millions to spread misinformation about the effects of the current deficits, and it works. The Obama stimulus package was first reduced in size and then 30% was offered in the form of tax cuts, which are less efficient than giving cash to people who had no income to pay taxes with.

Maybe we would be better off if the deficit hawks did go on strike. Their policies have already kept too many people out of work as it is.

Sam Uretsky is a writer and pharmacist living on Long Island, N.Y.

From The Progressive Populist, November 1, 2009

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