Government As The Homeowner, Revisited: To Scrap Or To Invest?

Consider a homeowner who owes a typical mortgage on a house and makes just enough to keep up with the bills and maybe every once in a while treat the family to something nice like a dinner out or a trip to the zoo.

Does it make sense for that homeowner to sell the car he uses to get to work in order to pay down the mortgage faster?

How about if he skips paying for the annual licensing for his field of employment (required for his career) to pay down the mortgage faster?

In order to pay down that mortgage faster, does it make sense for that homeowner to stop buying food for the kids, getting reasonable check-ups and other medical attention as needed, and keeping the house warm enough that the pipes won't freeze?

Should the homeowner cut out all trips to the library for books for the kids so as to save on gas and send bigger mortgage payments? How about toys? Should the homeowner never buy a toy again until the mortgage is payed off, even if it's a just started 30 year mortgage and he has a newborn with no toys beyond a single teething ring?

Does any of that really, truly make sense?

How about investments? Should the homeowner stop contributing a modest sum to his retirement plan and an education savings plan for his kid? Even if both of those investments are expected to have a return higher than the interest on the mortgage?

And if the homeowner can reasonably expect to get significantly higher pay from investing in his career, what then? Let's imagine this homeowner could put $1,000 on his low interest home equity line and get training and certification that on average increases a certified individual's pay by $1,000 a year. Would it be more sensible, rational, and responsible for the homeowner to get this certification or to avoid taking on a little bit more debt?

Our government is this homeowner. Our debt is this manageable mortgage.

When we're at full employment -- unlike now -- there would be no certification we could expect to be a safe bet to increase our income steadily. But we're not there. Not even close.

When we're well below full employment on account of a consumer demand shortfall -- like now -- just about any additional spending we have the government do can typically be expected to add to commerce and help push us that little bit closer to full employment. That means higher revenues. And that's without even focusing it into the most useful spending, which we can and should do to get the most bang for the buck by spending on adding to infrastructure, R&D, and other investments known to build the most revenue.

It should already be an obvious choice. But unlike the homeowner, the government gets an additional win by investing that spending in increasing revenue. Since additional employment means less unemployment, medicaid, and other liabilities, the government reduces its costs by increasing its revenue. That's not just a win-win ... it's a no-brainer. It's stunningly obvious. We should be investing in raising our revenue by engaging some short term spending (preferably including long term investments in that short term spending).

Now if only the budget cutters in Congress could see that.

What Does The Sequester Mean? Unemployment.

What does the sequester mean? In a word, unemployment.

By most estimates, the sequester will reduce 2013 GDP growth from what would be somewhere around 3% to somewhere around 2%. That might not sound so bad. After all, it's still growth, right? One might think that if one is not familiar with Okun's Law. We need some growth in the economy to deal with growth in population, productivity, and other factors.

How much growth do we need to break even? Around 2.7%.* That's roughly the rate of economic growth we need just to keep a steady rate of unemployment. When we're not already at full employment -- and we certainly aren't likely to see full employment in 2013 -- any growth rate higher than what's needed to break even will translate to a reduction in unemployment. And should we drop to a growth rate below that break even point, then expect bad things to happen to the unemployment rate.

Remember what the common estimates were for GDP growth without the sequester? 3%. That would mean that if it weren't for the sequester, then we could expect a slight drop in the unemployment rate over 2013 due to just enough jobs being added to see some improvement.

And then there's the sequester. With estimates of the sequester slashing growth down to 2%, that means for 2013 we're likely to be below the break even point in growth. Rising unemployment looms on the horizon.

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* Estimates vary, among other reasons because the current steady-state figure can vary a bit with various conditions, but 2.7% is in the rough ballpark.

Looking Forward To Recession? Thank A Deficit Hawk.

Budget cuts during a depression? Expect a recession. And for that recession, thank the obsession with deficits. Because apparently the recession of 1937-38 has been largely forgotten, at least among most Republicans and a few Democrats who join them in worrying about the deficit at what's clearly the wrong time. Trying to balance the budget during a depression is not just an error ... it's a classic error.

"The 1937 episode provides a cautionary tale. The urge to declare victory and get back to normal policy after an economic crisis is strong. That urge needs to be resisted until the economy is again approaching full employment. Financial crises, in particular, tend to leave scars that make financial institutions, households and firms behave differently. If the government withdraws support too early, a return to economic decline or even panic could follow." 

- Christina Romer in "The lessons of 1937" writing for The Economist

This infatuation with deficits and debt steered us wrong before. It looks like we're doomed to repeat the lessons of history that deficit hawks have failed to learn.

Ed Asner And Towers of Money

With a flaw or two, Ed Asner tells it (mostly) like it is with a little help from animators:

It contains an oversimplification or two. It overly blames "rich people" without mentioning ignorant and misinformed people. And the video fails to mention that there are a number of "rich people" who weren't complicit -- at least not actively -- in that problem. And it seems there are some "rich people" who actually want to do the right thing. The core flaw with this video is that it paints rich people as a monolithic block of villainy, an impression that isn't generally correct.

However, such flaws aside, it does do a fairly good job of generally describing the breakdown in the economy. In a consumer society, one does not create prosperity by shoveling more and more via tax breaks to those who already consume all that they care to consume. In a consumer society, one creates prosperity by strengthening those classes of consumer that do not already have the income to consume all that they care to consume.

Jobs Versus Budget Cuts: It's One Or The Other

So many still seem to be missing this basic point:

"Right now the central challenge is to reignite the economy — getting jobs back, improving wages, and restoring growth.  

Deficit reduction moves us in the opposite direction. That’s because most consumers (whose spending is 70 percent of economic activity) are still losing ground, and businesses won’t expand and hire without more consumers." 

- Robert Reich in "The Economic Challenge Ahead: More Jobs and Growth, Not Deficit Reduction"

At least, so many among the Republican movers and shakers and apparently in the Oval Office too. Why? One can only presume that they're still taking it on faith that reducing the deficit is the most important thing ever, despite all the mountains of reason to believe otherwise.

One data point in that mountain, as Reich puts it,

"Likewise, cuts in government spending, such as occurred in the fourth quarter of 2012, cause the economy to contract — as it did in the fourth quarter."

In order to move the country in the right direction, policy needs to get the basic problem correct. So long as they figure deficit reduction via budget cutting is the order of the day, they'll continue to hurt. Everything. Including the deficit.

"For 60 years (!) the pattern has held. When unemployment drops, the deficit as a percentage of GDP drops. When unemployment rises, the deficit rises." 

- Joe Weisenthal in "There's Only One Way To Fix The Deficit — And Actually It's Totally Painless"

Sure, we could possibly have jobs despite their budget cutting. After all, we've had some recovery so far, if a rather anemic one. But that's despite their budget cutting. The whole economy -- including the debt/deficit picture -- would be better off if deficit hawks weren't hamstringing us with their fixation on budget cutting.

Still A Huge Surplus Of Savings

Still a huge surplus of savings:

We're still very firmly in the situation where we could add lots and lots of deficit spending into jobs programs as well as more QE without a snowball's chance of spurring inflation.

Why Getting Back To Progressive Would Be A Win For The Wealthy Too

"Not even the very wealthy can continue to succeed without a broader-based prosperity. That’s because 70 percent of economic activity in America is consumer spending. If the bottom 90 percent of Americans are becoming poorer, they’re less able to spend. Without their spending, the economy can’t get out of first gear. ... Get it? It’s not a zero-sum game. Wealthy Americans would do better with smaller shares of a rapidly-growing economy than with the large shares they now possess of an economy that’s barely moving."

- Robert Reich in "The Non-Zero Sum Society"