May 30 2012

Macro economics for dummies

A buddy of mine really freaked me out the other day when he demonstrated he’d bought into the Austerians hook, line, and sinker. I. e., that the way out of a recession is gut government spending. During the discussion he threw out “I took macro economics, I know how it works.” I didn’t argue with him because, one, I love the guy to death, he and his wife are some of the most decent compassionate people I’ve ever known, and two, I judged it would have been pointless. But if I was going to try to argue on those terms, here’s how it might go …

What is the standard practice for the Federal Reserve when indicators pick out a deepening economic downturn? If you said lower interest rates, you are correct! We can deep into swamp on this, what effect it has on demand deposits in the federal banking system, how it spills over into other interest rates determined by lenders like banks or bondholders bidding on paper. But suffice it say the fed does this in the hope of increasing private sector demand. The reason is simple: increased demand fights off recession.

But sometimes there is a particularly nasty economic calamity and that’s exactly what happened in October of 2008. Banks were on the verge of failing, which means unless the government propped them up, demand would really drop because ATMS would stop spitting cash and checks would stop clearing regardless of how many electrons were lined up on the positive side of a business or person’s bank account. The first thing the government did, beyond lowering the discount rate, was to juice the entire banking system with a shitload of money. Almost a trillion in cash and trillions more in no interest, no payment schedule loans as part of the Troubled Asset Relief Program or TARP signed into law by George Bush.

Short story, it worked, it bought the big banks time and it brought us depositors liquidity; our ATMs and checking accounts kept chugging along. As important if not more so, lines of credit for business big and small were preserved. In other words, demand was not allowed to dry up.

TARP was corrupt and vexing and pissed off both the right and left plenty. But it was enough to stabilize things for a while, it just wasn’t going to get us out of what everyone knew would be an absolutely brutal recession. The next step in preserving demand was the stimulus, a series of tax cuts, benefits extensions for those being laid of by the millions, and projects at home instead of places like Afghanistan and Iraq. Again, the whole idea is to preserve demand. If people just flat stop buying everything from cell phones to cars to yachts, demand drops and that could have kicked off a full on Depression that could last for a decade or more.

At the time many economists warned the stimulus wasn’t big enough. Some of us pointed out the peculiar lesson being conveyed, that there is now no moral hazard, no risk in taking risk if we’ll socialize corporate losses but keep the profits private. But demand is demand and it had to be preserved literally at all costs.

Now enter the Austerians. Their argument is that, somehow, slashing government spending and thus laying off thousands and thousands of people directly or indirectly employed by the government, while also cutting unemployment benefits, Medicaid, food stamps, whatever you pick, would somehow have the same effect as increasing demand.

No one actually believe this. It’s one of those weird pieces of mythology the right spews and for some bizarre reason the rest of us have to pretend there’s an actual argument behind it. What’s even funnier is the same people pushing the idea that cutting spending is somehow going to increase demand also insist that cutting taxes and putting more money into the hands of rich people will … increase demand. The cynical humor of this glaring inconsistency is apparently lost on the Austerians, but there it is.

We all know and agree on why the fed lowers interest rates in a recession, we all know why the fed insures bank deposits (They didn’t used to and that ended badly), we all know why the fed makes sure the banks can keep operating: it’s to preserve consumer demand. Very few people who understand that basic idea really believe that gutting spending from anyone, whether it’s the government at any level or the Keebler Elves, will increase demand and lead us out of recession. The only reason they claim to believe it isn’t because of any rationale or historical data. They’re doing it because their conservative team is wavign them on.

On that point, really, listening to Republicans and Wall Street CEOs opine on the economy, much less scold the rest of us on debt management and economic stewardship after they turned a budget surplus into the worst deficit and economic disasters since 1929 and produced the most toxic debt in history, is like being forced to hear LBJ scold the country on failing to provide an exit strategy out of Vietnam.


  1. 1
    Raging Bee

    Is “Austerians” another word for “Austrians?” If so, I suspect that the Austrians may not have really said what their Republitarian fanboys say they said. I remember arguing with one libertard who was going on about how “The Austrians” say this and that, and someone else (who was more credible) simply questioned whether “The Austrians” really said all that in the first place.

    Republitarians lie about what the Founders said, so it’s really not a stretch to think they’d lie about what a bunch of economists say.

  2. 2

    I think the reason the Austerian POV resonates with so many people is that they put it in terms of what the common person deals with every day…their own money. The majority of people get paid pretty much the same every other week or twice a month. If you are running into financial problems, usually you need to look at cutting your spending. It is really the only lever most people have.

    Most people are not involved with something like a business where there a several levers that can (and should) be pulled. Financial issues are not only addressed by cutting spending (although many modern day CEOs look at doing this regardless of the business doing well or not), but also by increased sales which may actually involved increased spending (advertising, more salespeople, etc) at least for a little while.

    Government can indeed spend its way out of a recession. This was accomplished to a very large extent by FDR spending on infrastructure during the great depression created many jobs directly as well as a large number of jobs indirectly (private / public businesses benefited from having to support the infrastructure projects). Of course, the right-wing wackos are trying to claim that FDR extended the Great Depression in this way (just like they are trying to deify McCarthy), but everyone else who has studied that time knows that the spending is what got us out.

  3. 3

    While I agree with you DS, you’re missing a step or two in the Austeritians’ argument.

    I typically don’t hear them directly link austerity with increasing consumer demand. They usually argue that one of the main reasons businesses aren’t hiring (which equates to high unemployment) is a lack of “confidence” in the overall economy, this lack of course being directly tied to federal deficits and the ever-increasing debt (with cries of “over-regulation” thrown in for good measure). Thus, if only the federal gov’t would (cue cliches) “get its house in order”, “balance its budget”, “reign in out of control spending”, etc., the business community would have more certainty about the economy and would have enough confidence to make more things, hire more people, and invest in capital. That way, everything works!

    Of course the glaring hole in this argument is the obvious question I ask of my friends who promote such things: Why would any business hire more workers, increase production, or make capital investments if no one is buying their products or services? If they don’t have many customers, what are these new employees going to do? Why are they hiring them in the first place?

    The underlying assumption in the austerity-confidence argument is that business are currently swamped with customers and thus would love to hire more employees, but simply lack the confidence to do so. It’s ridiculous, but there ya’ go….

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