ECONOMIC DANGERS

I suppose to protect myself I should say that I am not a financial adviser and the following is not financial advice. I have become concerned with recent economic developments. So-called deficit hawks, which seem to include most blue dog Democrats, seem to be in the ascendancy. An attempt to fund unemployment benefit payments and COBRA subsidies is floundering in the House, as is an attempt to provide states with $23 billion so that hundreds of thousands of teachers will not be laid off. The jobs /unemployment report for May included the information that 22,000 jobs were lost in that month in state and local government. In fact, because state and local governments have to have balanced budgets, they have cut back their spending by $150 to $200 billion over the last year or so. In addition, in Europe we see the same sort of attitude expressing itself in some countries, especially Germany and England. The result may very well to strangle the economic recovery, or at least slow it way down. You might be as well off putting your money under the mattress right now as investing it somewhere.

Don't be misled by those who gravely warn of the dangers of the deficit and looming inflation. The Great Depression provides the perfect social science laboratory for what government policies to follow and what not to do. Under Hoover, before the Crash, the unemployment rate was estimated at 3%. After the crash Hoover insisted on balanced budgets, was strongly opposed to any government relief efforts (there was no unemployment insurance then, or food stamps, or anything on the Federal level, a few states tried to do something, but they quickly ran out of money). The result was that by March, 1933, when FDR assumed the presidency, the unemployment rate was an estimated 25% and the GDP had fallen about 40%. Under FDR unemployment fell and GDP rose every year, except one. That year was 1937, the only year that FDR ran a balanced budget. As soon as he balanced the budget the unemployment rate went up and the GDP fell. When he resumed deficit spending, the economy rose again.

I remember reading that a wag once said that if you teach a parrot how to say "supply and demand", you have created another economist. However, modern day conservative economists seem to believe that the key phrase should be supply and investment. They pretty much ignore the demand side of the equation. In a severe recession the demand side needs to be pumped up by government spending. The historical record is clear on this.

The famous economist John Maynard Keynes was once accused of flip flopping. He replied something like this. "When I get new information that calls into question my previous theories and/or conclusions, I re-evaluate those theories and conclusions and revise them on the basis of the new information when called for. What do you do?" What conservatives do is close their eyes and pretend the new information doesn't exist. So we get conservatives saying the stimulus bill didn't work, despite the fact that before the bill we were losing about 700,000 jobs per month. After the bill was passed job losses declined every month until January, 2010 when we had the first job gains in about two years. We have had job gains every month since then. Yet this is somehow "not working."

We need to keep deficit spending until there has been a major improvement in unemployment. Please write your congress person, your newspaper, internet news site, etc. to support continued government spending. The best way to balance the budget is to put people back to work, reduce defense spending, and re-institute a truly progressive income tax.