Confidence!!!

[cthulu2016]

Last edited Sat May 5, 2012, 02:03 PM - Edit history (1)

As regards the economy, the idea that austerity measures could trigger stagnation is incorrect... In fact, in these circumstances, everything that helps to increase the confidence of households, firms and investors in the sustainability of public finances is good for the consolidation of growth and job creation. I firmly believe that in the current circumstances confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today.”

Jean-Claude Trichet, 2010
[font color=red]President of the European Central Bank[/font color]
(A quote cited by Krugman: http://krugman.blogs.nytimes.com/2012/05/03/feel-the-confidence/)

Okay... stepping through this is instructive. This was the President of the ECB making a spectacularly dumb prediction that was refuted by facts within months. But this was not merely a poor prediction. It was a poor prediction derived from a ridiculous ideology that has nothing to do with how the world works.

The thesis (subscribed to by dumb reactionaries the world around, seemingly) is that government budget deficits decrease productive economic activity and government austerity produces higher levels of productive economic activity.

Since this is contradicted by most historical fact and theory we have to ask, what is the mechanism by which that it supposed to happen?

Confidence!!!

Now, confidence is indeed a key economic factor. If you are confident that widget sales will increase you will open another widget factory. And on the personal level, if you are confident that you will not be laid off, and that you can easily find a comparable job if you are, you are likelier to spend money.

But Trichet wasn't talking about the confidence we get from having guaranteed healthcare and a reliable income. He was talking about "confidence of households, firms and investors in the sustainability of public finances."

Household confidence in the sustainability of public finances? WTF'ingF???

Have you ever in your life made any "growth and job creation" economic decision based on the size of the budget deficit? Has anyone? "I was going to hire three new people, but then I heard on the news the budget deficit was up." "The bank called and approved our mortgage... but then I thought about the budget deficit and canceled the sale." "I was going to buy a Harry Potter DVD... but with this budget deficit how can I justify it?"

We do not make decisions like that.

When people make economic decisions based on the government's fiscal balance sheet they are making decisions based on their prediction of the deficit's effect on interest rates or taxes or some other effect, not on the existence of the deficit itself.

A high budget deficit could crowd out private borrowing or seem to threaten future inflation and thus make mortgage rates higher and thus dissuade someone from buying a house. That is true. That can happen.

But if the budget deficit does not cause high interest rates or high inflation (which is the case in the real world of today) then it is irrelevant to private planning. (Okay, it is vaguely conceivable that somebody might reason that they cannot afford a house because their taxes are sure to double soon to pay down the debt. Not very politically realistic, but I suppose somebody could think that.)

These deficit monkeys do not get that interest rates and inflation will indeed respond to deficits in a growing economy but have a very difficult time increasing in a depression-like environment. They ignore the fact that Japan intentionally ran insane deficits in hopes of creating inflation, with no success.

When Clinton balanced the budget it may well have fueled GDP and jobs (and the internet bubble). If Obama balanced the budget we would enter something worse than the great depression. Two different economic environments.

Thinking that economics can be as rigid as religious dogma, like when the Republican answer to all possible situations is tax cuts for the rich, is useless.

But these perma-deficit-hawks think, dogmatically, that government spending must lead to higher rates which then lead to decreased economic activity and then they reduce their (largely ideological) equation to:

Deficits = Reduced economic activity

Voila! And when you point out that government spending is economic activity, crickets. Um... it's that bad kind of economic activity.

I swear, some of these people would tell you that a deficit funded WPA type program would increase unemployment because deficits must be bad for employment, even when they pay for direct hiring of people!

It's like when I was arguing with an "Austrian" recently (Austrian economics, not nationality) and noted that we had exploded the money supply without increasing inflation, which made his views kind of... weak.

He replied that Austrians define inflation as increases in the money supply.

I asked whether it was useful to use the word inflation to describe declining prices. (Which was the case in Japan when they doubled their money supply in 8 years of deflation.)

Bigger money supply = inflation. Even if prices go down.

Bigger Deficits = Economic contraction. Even when bigger deficits actually lead to economic expansion.

So how much thinking that kind of equation saves?

[pscot]

2. But we do have inflation

in food, energy, medical care, education; the tires I need are going to cost 40% more than the last set; same tires, same seller. Meanwhile wages are stagnant if you're lucky enough to have a job. This is stagflation, and it's crushing the lower end of the middle class.

[cthulu2016]

3. we really don't

Higher prices in certain sectors or certain commodities are not inflation. They suck, but are not inflation. By definition, inflation affects everything.

If we had any substantial net inflation then no bank would give anyone, no matter how credit-worthy, a 30 year mortgage at 3.85%.

[pscot]

6. According to the BLS inflation calculator

Goods and services that cost $10,000 in the year 2000, the year I retired, would cost $13,321.25 today. That's 33% in 12 years. If it walks like a duck and quacks like a duck......

[cthulu2016]

7. You are not very familiar with the habits of ducks

Your post suggests that a 33% increase in 12 years represents some noteworthy level of inflation. This is due to a basic misunderstanding of compounding.

Do you consider 2%/year a high level of inflation? The US economy can barely operate at 2% inflation. That is a dangerously low level of inflation.

At 2.5% per year, which is a weakish maintainance level of inflation, goods and services that cost $10,000 in 2000 would cost 34% more today.

You are complaining about a period when inflation averaged less than 2.5%, citing what is probably the least inflationary twelve years of any such period in any our lifetimes as an inflation problem.


U.S. Price Inflation (CPI-U, Annual Average) 2000-2012
2000 = 3.40%
2001 = 2.8%
2002 = 1.6%
2003 = 2.3%
2004 = 2.7%
2005 = 3.40%
2006 = 3.2%
2007 = 2.8%
2008 = 3.8%
2009 = -0.4%
2010 = 1.6%
2011 = 3.2%
2012 = 1.3%

[pscot]

8. 2.5% inflation coupled with wage deflation

and offshore job migrattion leaves the middling class in an untenable situation. The fact that the price of some electronic gadget from China has gone down means nothing to people whose major expenses involve food, energy and medical care. It may not meet some technical criteria for inflation, but it's never the less slowly drainng the hope and vitality out of half the people in this country.

[cthulu2016]

9. I am not suggesting that it isn't harder for people to live

It is MUCH harder for people to live. It is much harder for people to make ends meet.

But the problem is not inflation, it is a lack of wages.

We are so used to flat or declining wages that the idea of higher wages seems fantastic, and inflation is viewed as a zero-sum loss for workers. Any rise in prices must be a loss because we take flat wages as a given.

If we look at the periods where working people made real advances in quality of life they are inflationary periods. The periods when people get slaughtered are low inflation periods.

Medicine and higher education are going to go up either way because they are cartels and monopolies. They go up with or without inflation. And food and energy will go up because there is much, much more demand for food and energy from China and India.

But with low inflation wages will never go up and the average person will devote a higher and higher percentage of those stagnant wages to interest on debt.

When someone says, "We need more inflation" that is read as "we need higher milk prices."

But that is looking at one sliver of the equation.

Inflation hurts holders of debt. The bank that holds someone's mortgage at 5% made a huge bet on low inflation. The borrower made a huge bet on high inflation.

Inflation in America essentially stopped in 1982. Since that time financial firms, once considered slow but steady businesses, have increased their profits by a zillion percent, wages have been flat, income inequality has exploded and the economy has been host to a series of devastating investment/asset bubbles.

The super-rich wanted low inflation, and they got it. And the worker has been getting crucified.

No worker wants to pay more for something she needs to buy, but low inflation is very, very bad for workers and very, very good for banks.

[pscot]

10. I don't disagree with what you're saying

The 80's had relatively high inflation and I did very well because I was protected by an uncapped cola. The current system has been rigged through a series of modifications to the CPI that have defined consumer inflation out of existence. the chief beneficiaries of the changes have been business. Wage and pension adjustments tied to the CPI have taken the hit.

[cthulu2016]

13. The COLA problem is indeed real

A cost of living measure is not, or should not be, the same as inflation. Though inflation has been very low lately that does not mean that the cost of human subsistence has been very low.

This environment is perverse. Because India and China are moving closer to a western standard of living there is fierce global competition for precisely the things that constitute our standard of living.

If milk and gas go up while a house loses $100,000 of value that is anti-inflationary in the economy, but the average person buys milk ad gas a lot more often than they buy a house.

I am all for adjusting COLAs, but I would not want to do so by reducing the macroeconomic usefulness of CPI. I think CPI is a good economic measure, but perhaps a subsistence index would be useful... something to average with CPI to give greater weight to the unavoidable expenses of life.

[coalition_unwilling]

4. Emphatic K&R. The idea that deficits cause contraction (and that

you can cut your way to growth) was pretty decisively refuted, um, back in 1937 when FDR's team allowed deficit hawks to gain the upper hand and, voila, the nation shortly thereafter experienced lower GDP and higher unemployment. You would think the morons could never have gotten their econ credentials without at least a passing familiarity with economic history. But, no, if we're unlucky, we'll get Romney in 2013, cuts in spending and 25% U3 unemployment by 2014.

Most Americans fail to comprehend the difference between the national debt and a budget deficit AND NEITHER KNOW NOR CARE that they do not comprehend said difference. So that's why the morons can have such influence.

[Egalitarian Thug]

5. Vain K&R.

[ProSense]

11. President Obama

When Clinton balanced the budget it may well have fueled GDP and jobs (and the internet bubble). If Obama balanced the budget we would enter something worse than the great depression. Two different economic environments.

...doesn't have to balanced the budget, not possible, but here's what he can do and has done:

Mr. Obama gets too little credit. He has done more to rein in long-run deficits than any previous president.

http://www.nytimes.com/2011/02/18/opinion/18krugman.html

[cthulu2016]

12. Yes, Obama doesn't have to balance the budget

"If Obama balanced the budget we would enter something worse than the great depression."

That sentence is hardly a call for Obama to balance the budget. I support the current budget deficit and wish it was much larger.

In fact, I would prefer that the federal budget deficit in 2012 was, when added to all private borrowing in the economy in 2012, equal to all borrowing (public and private) in 2006 or 2007.

As the borrower of last resort the federal government is obliged to be running an astonishing deficit right now.

As for the long-term deficit reduction in Obamacare, that is also welcome because it is in the long-term future. If the economy recovers then deficits will no longer be the only thing keeping the USA afloat and will be a negative thing.