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The Monster Is Eating Itself

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Back on February 10, 2009 – before President Obama had completed his first month in office – two students at the Yale Law School, Jeffrey Tebbs and Ady Barkan, wrote an article which began with the point that the financial crisis was caused by the recklessness and greed of Wall Street executives.  Tebbs and Barkan proposed a “windfall bonus tax” on those corporate welfare queens of Wall Street, at the very moment when budget-restrained states began instituting their own economic austerity measures so that The Monster could be fed:

Last week, Connecticut Gov. M. Jodi Rell proposed a state budget that slashes crucial public services, including deep cuts to health care for kids and pregnant women, higher education and consumer protection.  She says that the cuts are necessary to close our state’s budget shortfall, but she’s apparently unwilling to increase taxes on Connecticut’s millionaires.

That is to say, while your hard-earned tax dollars are funding Christmas bonuses for Wall Street’s jet-set, Connecticut’s government will be cutting the programs and services that are crucial to your health and safety and to the vitality of our communities.

Since that time, “reverse Robin Hood” economic policies, such as the measures proposed by Governor Rell, have become painfully widespread.  As an aside:  Despite the fact that Governor Rell announced on November 9, 2009 that she would not seek re-election, the conservative Cato Institute determined that Rell was the only Republican Governor worthy of a failing grade on the Institute’s 2010 Fiscal Policy Report Card.

The entity I refer to as “The Monster” has been on a feeding frenzy since the financial crisis began.  Other commentators have their own names for this beast.  Michael Collins of The Economic Populist calls it “The Money Party”:

The Money Party is a very small group of enterprises and individuals who control almost all of the money and power in the United States.  They use their money and power to make more money and gain more power.  It’s not about Republicans versus Democrats.  The Money Party is an equal opportunity employer.  It has no permanent friends or enemies, just permanent interests.  Democrats are as welcome as Republicans to this party.  It’s all good when you’re on the take and the take is legal.  Economic Populist

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The party is also short on compassion or even the most elementary forms of common decency.  It’s OK to see millions of people evicted, jobless, without health care, etc., as long as short term profits are maintained for those CEO bonuses and other enrichment for a tiny minority.  It’s perfectly acceptable for this to go on despite available solutions.  If you don’t look, it’s not there should be their motto.

Beyond that, The Monster’s insensitivity has increased to the point where it has actually become too numb to realize that the tender morsel it is feasting on happens to be its own foot.  Until last year, The Monster had nearly everyone convinced that America would enjoy a “jobless recovery”, despite the fact that the American economy is 70 percent consumer-driven.  Well, the “jobless recovery” never happened and the new “magic formula” for economic growth is deficit reduction.  As I discussed in my last posting, Bill Gross of PIMCO recently highlighted the flaws in that rationale:

Solutions from policymakers on the right or left, however, seem focused almost exclusively on rectifying or reducing our budget deficit as a panacea. While Democrats favor tax increases and mild adjustments to entitlements, Republicans pound the table for trillions of dollars of spending cuts and an axing of Obamacare.  Both, however, somewhat mystifyingly, believe that balancing the budget will magically produce 20 million jobs over the next 10 years.

Simon Johnson, who formerly served as Chief Economist at the International Monetary Fund, conducted a serious analysis of whether such “fiscal contraction” could actually achieve the intended goal of expanding the economy.  The fact that the process has such an oxymoronic name as “expansionary fiscal contraction” should serve as a tip-off that it won’t work:

The general presumption is that fiscal contraction – cutting spending and/or raising taxes – will immediately slow the economy relative to the growth path it would have had otherwise.

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There are four conditions under which fiscal contractions can be expansionary.  But none of these conditions are likely to apply in the United States today.

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The available evidence, including international experience, suggests it is very unlikely that the United States could experience an “expansionary fiscal contraction” as a result of short-term cuts in discretionary domestic federal government spending.

Economist Stephanie Kelton explained that the best way to lower the federal budget deficit is to reduce unemployment:

The bottom line is this:  As long as unemployment remains high, the deficit will remain high.  So instead of continuing to put the deficit first, it’s time get to work on a plan to increase employment.

Here’s the formula:  Spending creates income.  Income creates sales.  Sales create jobs.

If you think you can cut the deficit without destroying jobs, dream on.

Dr. Kelton has identified the problem:  Deficit reduction schemes which disregard the impact on employment.  Nevertheless, The Monster is determined to press ahead with a “deficits first” agenda, regardless of the consequences.  The Monster will have its way because its army of lobbyists has President Obama under control.  As a result, we can expect increased unemployment, a diminished tax base, less consumer spending, less demand, decreased corporate income, lower GDP and more deficits.  The Monster’s gluttony has placed it on a course of self-destruction.  Perhaps that might be a good thing – if only it wouldn’t cause too much pain for the rest of us.


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