Of Oxymorons & Plain Morons

Dolors & Sense 

by Sanford Rose

“. . . the crucial point is that unless the government stimulates now in order to lift output, future output will unquestionably fall, and probably by a lot more than 1 percent.” Sanford Rose

KISSIMMEE Florida—(Weekly Hubris)—5/7/2012—The morons who appear to control Washington’s political and legislative life are ruining the country by their inability to understand the basically oxymoronic nature of today’s economic situation.

That this situation is oxymoronic is indubitable.

In these uncharacteristic times in the USA: To spend is to save.

To go into debt is to improve the nation’s credit.

Austerity, by contrast, is profligacy.

These propositions are demonstrated econometrically by Professors Brad De Long (http://seekingalpha.com/article/426621-the-limits-of-monetary-policy-in-a-liquidity-trap) and (yes) Larry Summers, himself.

They argue that: 1) because there are still so many unemployed and underutilized domestic resources (both labor and capital), 2) because the rest of the world will still lend the USA money at a derisory interest cost, and 3) because the Federal Reserve is still wedded to the most accommodative monetary policy in its history, the government can borrow huge sums to fund a new, properly crafted stimulus program that will raise economic growth by enough ultimately to reduce, not raise, the Federal deficit.

Marshalling an impressive set of numbers, the two luminaries lay it out candidly:

If you spend now, you do not burden our children with bigger tax liabilities, you lighten their load.

An oversimplified view of the argument:

If the central bank is not about to offset a looser budgetary policy with a tighter monetary policy, then it is likely that every $100 in extra federal stimulus will lift the national product by $150.

Taxing the increment at 33 percent, the government recoups $50 of the initially spent $100.

If it pays 1 percent in real interest on the remaining $50, the cost of debt service is obviously 50 cents.

So if, by raising output by $150 today, the government can avoid future declines in production equal to 1 percent of that output, then the cost of servicing the $100 in incremental debt that initiated the process is zero, zilch, nada (because the government picks up future tax revenues equal to 50 cents—33 percent of the $1.50 in income that would otherwise not have been created).

And the crucial point is that unless the government stimulates now in order to lift output, future output will unquestionably fall, and probably by a lot more than 1 percent.

That’s largely because the long-term unemployed are rapidly dropping out of the labor force and/or losing their marketability (work skills) should they try to return.

All of which serves to reinforce the hoary notion that a private virtue (thrift) can sometimes become a public vice. Those who insist on short-term draconian measures to reduce deficits may exacerbate the condition that they profess to hold in the greatest abhorrence.

Drop the oxy. Think, morons.

(But that doesn’t drop anything at all. Right?)