[R-G] [BillTottenWeblog] Challenging economic dogma

[Bill Totten]

On spending, debts and currency, the recession forces a re-think of some
cherished American policies

by Mark Weisbrot

guardian.co.uk (March 04 2009)


A serious economic crisis can force some rethinking of economic and
political dogma. The current crisis is serious for most of the world:
the IMF is projecting world economic growth of just 0.5% this year - the
worst since the second world war - and this number could easily be
revised downward.

In the United States, one of the first casualties of the current
recession was the extreme fiscal conservatism that has plagued the
country for decades. It seems like ages since the Clinton
administration, facing projected budget surpluses of more than $5
trillion, decided that it needed to pay off the entire national debt
before committing to any new social spending. President Barack Obama's
proposed budget has a deficit for this year of 12.3% of GDP - twice the
size (relative to the economy) of the next largest deficit in the six
decades since the second world war. (That was Ronald Reagan's "military
Keynesian" budget of 1983.) Like his successor George W Bush, Reagan
never admitted that deficit spending was needed to pull the economy out
of recession. Instead he pretended that he was just meeting "defence
needs" and granting tax cuts where tax cuts were due (mostly to the
wealthy).

Today there is a pretty sizeable consensus that deficit spending is very
necessary, whatever the Republican leadership may think - if they are
thinking at all. This is really just a matter of national income
accounting. With consumption and investment falling, that leaves only
government purchases and net exports to pull us out of this recession.
More on net exports (exports minus imports) in a minute - but for now
this part of our economy is not set to grow enough to pull us out of the
recession. Hence the need for the government to step in, in a big way.

Of course, this could be just a temporary change in thinking, with
desperation focusing the mind. But there are some signs that it may
persist. For example, the New York Times reported on Sunday that Obama's
projected budget deficit for 2013 is "three per cent of the overall
economy, a level that economists consider sustainable".

Indeed this is true, and the arithmetic is simple: If the debt grows at
the same rate or slower than the GDP (in nominal terms) it will not grow
as a percentage of the economy. That is what matters, not the absolute
size of the public debt - a big scary number ($10.9 trillion) that is
often thrown around by conservatives. As evident as this is, the major
media have almost never looked at the problem in this way before.

Another long-held belief that is currently being challenged in practice
but needs to be rethought is the extent to which the government can
finance a fiscal stimulus through money creation, rather than by
traditional borrowing. The conventional wisdom is that this would
dangerously increase inflation. But inflation is falling in most of the
world, and in the US, prices are actually dropping. The US consumer
price index fell at an annual rate of 8.4% over the last quarter. Even
the core index (excluding food and energy) was up by only 0.9% over the
quarter, and the rate of inflation has been declining.

The US government has already financed at least $1.2 trillion of
borrowing during this crisis by creating money, which was added to the
Fed's balance sheet. This technically adds to the national debt, but
since the government owes the money to itself, there is no net outflow
of interest payments from the government on this debt. This reduces the
long-term debt burden of the necessary stimulus. Clearly there are
circumstances under which this "monetising" of some additional borrowing
makes sense because the threat of increasing inflation is minimal. The
present economic free-fall seems to be such a circumstance.

This has international implications as well. The Obama administration
has proposed scaling back at least some foreign aid. Of course, much of
our foreign aid is military aid that is often destructive. But it would
be a shame to cut back on such life-saving aid that goes to fight Aids,
tuberculosis, malaria and other diseases that plague the poorest
counties - when this funding needs more than ever to be greatly expanded.

On a larger scale, since the dollar has a special status as the world's
reserve currency, the United States could conceivably contribute to the
world economic recovery by providing dollars to help developing
countries through the international credit crunch and world recession.
Our government has done a little bit of this: for example, it created an
international currency swap arrangement of $30 billion each for Brazil,
Mexico, South Korea and Singapore, which added to the hard currency
reserves that these countries could tap if necessary. But many countries
are not adopting the expansionary macroeconomic policies that they - and
the world - need, for fear of running short of foreign exchange.

In other words, the United States - because of the special position of
the dollar - could to some extent play the role of a world central bank
in the present world recession. This would help stimulate our own
economic growth as well by increasing demand for US exports. Of course,
if the dollar were to lose value internationally in the process (because
of the increased supply of dollars worldwide), this would be an added
gain for the US economy.

That is because the US dollar is overvalued, and this overvaluation has
artificially stimulated our imports and reduced our exports for many
years. The idea that the United States needs a "strong dollar" could be
the next widely held economic misconception to bend to reality.

guardian.co.uk (c) Guardian News and Media Limited 2009

http://www.guardian.co.uk/commentisfree/cifamerica/2009/mar/03/us-economy-obama-currency


TO POST A COMMENT, OR TO READ COMMENTS POSTED BY OTHERS, please click
on the word "comment" highlighted at the end of the version of this
essay posted at http://billtotten.blogspot.com/