Dean Baker | The Weak Economy and Deficit Reduction: Deniers and Terrorists

[eridani]

http://www.nationofchange.org/weak-economy-and-deficit-reduction-deniers-and-terrorists-1383661880

The folks making economic policy in Washington are getting ever more resistant to evidence. As we approach the sixth anniversary of the downturn with no end in sight, the nation has been treated to the perverse spectacle of our Treasury Secretary celebrating the sharp drop in the deficit.

This is a bit like celebrating a sunny day in a region suffering from drought. In an economy that is suffering from lack of demand, as is the case in the United States today, smaller deficits are bad news. They mean less demand, slower growth, and fewer jobs.

This is not a complex point. Ever since the collapse of the housing bubble, the U.S. economy has suffered from inadequate demand. The inflated house prices of the bubble era led to a building boom. They also fueled a consumption boom, as people spent based on the $8 trillion in bubble generated housing equity. The bubble generated demand disappeared when the bubble burst leaving a gap in annual demand of more than $1 trillion a year.

The large deficits the government has run since the downturn began helped to fill part of this gap. Smaller deficits mean the government is filling less of the gap. That shouldn’t be hard to understand.

When the government hires people it is directly reducing the unemployment rate. These people will also spend their wages which further increases demand. It’s the same story when the government hires a contractor or directly buys goods produced in the private sector. Alternatively, when it pays out money for Social Security, unemployment insurance or food stamps, this money gets spent, adding to demand in the economy.

[Demeter]

1. Upton Sinclair explained it:

"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!"