Monday, July 18, 2011

Easy Economics Made Hard

With all the angst and anguish, carping and cat-calls, as well as just plain ignorance suffusing most public discussion of this terrible economy, you would be tempted to believe that it must be really, really, hard to figure out what we should be doing. Actually, it's pretty easy.

Just be ready to reject boilerplate truisms which sound like, well, sound advice.

An example is the oft repeated, "You can't get out of debt by making more debt." This kind of saying almost irresistibly elicits the thought, "Who could argue with that?" Well, the answer is that you could, and you not only could, you absolutely should. Here's why.

Getting out of debt by incurring more of it is extremely common. And it is common because it works. I bet you've done it, I know I have.

I have borrowed money to go to school and improve my income. I have bought tools on credit so I could perform work which would otherwise have been unavailable to me. I have made a loan to buy a truck to get to work instead of remaining unemployed.

I could go on. Your list may be different, but it comes to the same thing: using debt to make valuable investments yields greater value.

Now, take a look at the economy and what's wrong. We are suffering from scandalously high long-term unemployment, many who still have jobs are staggering under personal debt loads brought on both by lagging wages and the housing market collapse, much of our core infrastructure is simply falling apart from age and neglect, we remain dependent on fossil fuels which are subject to painful supply and price volatility, and, oh yeah, which are also killing the planet. Add to all of this that the wealthy pay lower tax rates, by far, than they have in over fifty years, all during the time the great American middle class was building and growing, instead of shrinking and dying as it is today. Now, there we have a real Kodak moment.

So, what do we do? Well, when you consider that business is raking in record profits, piling up money like never before without really having to do much if anything by way of investment, don't expect any relief from there. And with the beaten-down, scared as hell, nearly broke average consumer unlikely to cause any great uptick in demand or consequent need for private hiring, that leaves only government spending to break the stalemate.

You can be certain that if the simple, and simple-minded, prescriptions of  government frugality and retrenchment we hear everyday are taken seriously, and the public sector draws back too, we are in for a protracted period of hopelessness and decline.

The good news though is that money is as cheap as it has ever been. Interest rates are at rock bottom and no one wants to use this virtually "free" money. You can't make them. But the government sure as hell can use it, and use it well to invest in righting all the things gone wrong (see list above).

Rather than look to cut 2 to 4 trillion in spending, we should use that much or more to repair and rebuild hundred year old crumbling water systems, sewers, schools and bridges. These are all investments we know from experience pay off at least the rate of ten to fifteen percent on every nickel. Research and development of new and renewable fuel sources could well return far greater monetary dividends, as well as certainly relieve the burdens of climate change, coastal erosion, and vanishing traditional energy sources.

Also, do not fail to realize that cutting government spending now actually will explode the deficit and debt by further contracting economic activity, reducing revenues, and occasioning greater safety net expenditures. In other words, it is an open invitation for an unwelcome visit from our old friend Painful Irony.

We really should borrow damn near every penny on the planet that's being offered at near zero interest, and use it to restore real value to the balance sheets of the average citizen who then would be in a position to spike demand and cause private sector economic revival.

It is just that easy. It's so easy, I didn't even have to figure it out for myself. It's in all the history books. If we would only care to remember and be honest about the lessons of the past, it would be a lot easier on all of us. If we do not, it is going to be very, very hard for most of us for a very, very, long time.

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