Wednesday, April 13, 2011

Of Parallel Universes

If a tree falls in the woods, but no one is there to hear it, does it make a sound?

Dean Baker discusses government deficits.

First, the current deficit should not even be viewed as a problem. Yes, a deficit of $1.4 trillion is big, but this is a direct result of the loss of demand stemming from the collapse of an $8 trillion housing bubble. This bubble was driving the economy until its collapse. There were two channels through which the bubble generated demand in the economy: bubble-inflated house prices led to a boom in construction, bubble-inflated wealth led consumers to increase their spending, pushing saving rates to almost zero.

Basically, our consumer economy lived on credit, cheap imported goods, illegal immigrant labor, and moving money from place to place to make it look like more money. All of this in pursuit of higher real estate prices while simultaneously expanding the real estate supply beyond all measure of real estate demand.

And who knows how much money county governments sank into utilities for far flung new developments over the last decade that are now worth pennies on their previous dollars.

(I, of course, use the past-tense to describe the economy that was, not the economy we have now which has a foundation in attempting to re-create those conditions as evidence of "recovery.")

I get all of that.

So why would I compare Baker's column to a tree falling in the woods? Why is our nation focusing so much political capital on the Ryan Plan or the Bowles-Simpson Plan? Why does Baker's parallel universe sound a lot like the universe we live in?

I wonder if it is too late, and the debate to far gone, to insert dialogue like this into the conversation. But if there ever was a time, now would be it.

(HT: Alli)



patsbrother said...

I'm apparently a moron, because I don't follow the following logic.

We caused our problem by all living way beyond our means individually.

The solution is that we all live way beyond our means collectively.

Cousin Pat from Georgia said...

Did you even read the article?

If all the individuals who lived beyond their means can no longer participate in the economy, the economy continues to contract.

The rich and big businesses that "create jobs" hold onto their money during such a contraction, and stop taking risks, the economy (without new jobs) continues to contract.

The downward spiral is, theoretically, halted by the government's borrowing and increasing economic participation by expending common money and taking out loans.

This expenditure replaces the individual and industrial actors who are unable or unwilling to participate, and props up the economy until they are ready to participate once again.

But that type of government behavior runs up massive deficits in the short term in order to keep the economy functioning for the long term.

My problem isn't with that theory, my problem is that the economy that collapsed was unsustainable to begin with, and all the politicians seem interested in is re-building that house of cards. Not one leader has seriously addressed how we got here in the first place.