Tuesday, September 15, 2009

Ignore Deficit Accounting at your Peril

I'm naive, but I remain surprised at how difficult it has been to get any traction on Federal Reserve, Treasury, and Bank accounting. Dry topics, sure, but we live in an era of brushed-off Keynesianism and CDS.

Take this recent piece by Krugman who points out that the output gap is, and remains, large. He ends by noting:
In a rational political and policy environment, the implication of all this would be clear: we need more stimulus. Yes, it would add to federal debt — but isn’t that worth doing to help reduce an output gap that’s wasting our potential at the rate of more than a trillion dollars a year?

Apparently not.
He does not mention that people resist additional stimulus because it just amounts to handouts to politically connected constituencies, particularly Democratic ones, whose bad actions got us into this mess in the first place: labor unions (though GM and Chrysler), banks and other financial firms (who own the Republicans as well), and a host of beltway bandits. Individual households got a pitiful amount of the stimulus, I think about $200 each. Pathetic.

Krugman does not know that the Federal Deficit funds private savings, and the simplest, fastest, most equitable, most controllable way of doing that would simply be to declare a payroll tax holiday. Democrats argue against tax cuts because they say they will just be "saved", but think about what saving means: bad debts become good, households shore up their finances for future consumption, and what consumption there is will be directed to productive parts of the economy, not non-productive, but Government supported parts of the economy.

Libertarians and fresh water economists don't like stimulus because they cannot believe that the Government can be good for anything. They also claim that fiscal funding just creates "nominal" wealth, and not "real" wealth, forgetting that "nominal" does not mean "does not matter". Right now, the lack of nominal fiscal funding is destroying huge amounts of real wealth, as evidenced in the output gap and 10% unemployment rate.

The idea that Government 1) has a role, and 2) should do it right is alien to both camps

BTW. Here's your "inventory" for you. Looks good, doesn't it?


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