Archives for: May 2012, 21
There was good news from an economic summit of sorts that happened at Camp David over the weekend.
Basic expansionary economics lessons, the sort that have been in the first chapters of beginning economic textbooks for more than seven decades, say that most depressions, recessions, and downturns can come to a more rapid recovery with massive infusions of money from the government. Deficits are a good thing when the economy is way below capacity.
That's not why the news from Camp David was encouraging.
You see, the key word here is "most", as in most depressions, recessions, and downturns. The exception is the presence of high interest rates. When it costs a lot to borrow, that keeps potential employers from becoming actual employers. Customers can be beating down the door. In fact, since high interest is the traditional "monetary policy" cure for high inflation, consumers often have money in hand that will be worth less tomorrow, which would be an incentive to buy, thus driving up prices.
That's also not why the news from Camp David was encouraging.
Employers are in no mood to hire and sell when profits will be eaten away by high interest rates on loans required to expand. When interest rates are high, businesses are not the only ones having a hard time justifying borrowing. Consumers think twice about borrowing on high end items.
Nope, that's not the encouraging news either.
When interest rates are high, sometimes, austerity is at least part of the answer to economic slowdown. The sometimes here is simple enough. When the economy has slowed way down and interest rates are high, governments sometimes have no other choice but to balance budgets. When the economy is roaring, balanced budgets really are the key.
On the other hand, there is another hand. When it costs very little to borrow, that means interest rates are not a barrier keeping potential employers from becoming actual employers. Customers are the problem. You can have the lowest interest rates in the world, and employers would still be crazy to hire employees and and to invest in expansion, all to meet a consumer demand that isn't there.
So, here's the simple lesson from lots of experience, what the history of depressions and interest rates and deficits and recoveries and government action have taught us.
And THAT's why the news from Camp David was encouraging. Wanna know how it works?
When the economy is lagging, you want recovery, and interest rates are low, low, low, that's when deficit spending is the way to push money into the economy. It's cheap for government, it won't make it harder for businesses to borrow when the recovery is in full swing, and pushing money in gets more in the hands of consumers. Money in the hands of consumers means businesses want some of that money, so they borrow and hire and gorw and profit, and the upward spiral begins.
And here's the good news.
There's now an emerging consensus that more must be done to promote growth and job creation right now.
That was a quote from President Obama, issued to summarize the new direction of European leaders.
Harsh, harsh austerity has been the key strategy in Europe to creating jobs. It's been what Republicans want to copy into the United States to create jobs here.
German Chancellor Angela Merkel has been the leader calling for the policy. Ireland has been pushed as the ideal. Except real economic harm has been the result wherever and whenever austerity has been tried. Ireland went from being near disaster to way past disaster. Irish economy makes the Titanic attractive in comparison. England went from recovery to an economy that is actually shrinking, smaller today than it was yesterday - consistently the case during every day that ends in "day". Governments have been toppled in elections held in Greece, and France, and Spain, and now in regional elections in Germany.
Horrible economic suffering on the part of ordinary people has been a calculated part of what Chancellor Merkel still advocates. You know, have to break a few eggs to make an omelet. So the German elections against Merkel were a special embarrassment. Like a television faith healer who tells people to ignore doctors waking up one morning with appendicitis.
The destructive policy of starving the patient back to health is on the way to becoming the former policy of starving the patient back to health.
The new policy is a bit muddled right now. But it seems to be heading toward feeding the patient back to health, then going on a careful diet once the crisis is over.
Deficits now. Debt reduction when economies are thriving.
Kind of like the basic textbooks teach.