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Home Publications Blogs Beat the Press Analysts Warn that Cutbacks by State and Local Governments Can Worsen the Downturn and Raise Unemployment

Analysts Warn that Cutbacks by State and Local Governments Can Worsen the Downturn and Raise Unemployment

Tuesday, 27 April 2010 04:41

Oh yeah, the Post forgot to mention this part of the story. In an article that focuses on the debt burden facing an Italian city, the Post told readers: "analysts are also warning that national coffers could be further strained if heavily indebted countries are forced to spend precious resources to rescue local jurisdictions."

This is a problem for the euro zone countries who do not have the option to simply print money to boost their economy in the downturn. Since the basic probelm facing the world economy right now is inadequate demand, there is little reason that large economies cannot boost demand by simply printing money. The European Central Bank could do this on behalf of its member countries. It has chosen not to, thereby subjecting millions of people to unnecessary suffering. It is remarkable that the Post chose not to mention this fact.

Comments (5)Add Comment
written by izzatzo, April 27, 2010 7:30
The game theory of chicken,
Who will fail first,
The locals or states or the feds at the top,
Of a steaming pile of carnage and debt and rot.

There's a way out of this that's not believable,
Just print more money that's retrievable,
Issue even more debt on accounts receivable,
Until growth bounces back that's unconceivable.

Aggregate supply, for which there's no demand,
Will then be employed, spending even more,
Financed by the Fed, paid to Treas galore,
Fiscal hawks will save us with Keynesian lore.

Bubba get that dollar printing press, modified with holograms, upgrade it some more to do some Eurograms, we're in the money now, and we don't mean figuratively, time to pump up M with cash from anywhere, literally.
written by Queen of Sheba, April 27, 2010 10:22
If the Post actually stated that large economies could simply print money to counter lack of demand (and made the argument that that is exactly what the Fed is doing), their readers would scream to high heaven and join Ron Paul and his minions in their cries to shut down the Fed. I doubt the Post wants to encourage those people.

The Post is, however, engaged in a wholly disingenuous rant about the "problem" of this country's debt, so it's difficult to understand just what level public rebellion they wish to encourage. Maybe they want to keep their readers believing that "China will own us" if this country continues to live on borrowed money (I know that's what my neighbors believe), but I don't understand why they aren't attempting more to educate their readers than panic them.
State and local debt
written by scott, April 27, 2010 11:02
State and local debt is another issue that Dr. Baker hasn't really addressed. "Don't worry about federal obligations," he says, "we'll print our way out of it."

Yet, States and municipalities are passing bonds for maintenance work, the their budgets are bleeding red ink. For every dollar that the Federal gov't owes that is at a set interest rate (bonds) we owe 4 dollars that will grow with inflation.

I don't believe your model accounts for this debt that will elude us like Zeno's goal. Just as your model doesn't consider stagflation as an alternative to your false recession/inflation dilemma. Gov't taxes must pay off more and more debt service, meaning taxes will rise, or services will be cut. This represents another inflation, an inflation that will not be coincident with growth. This will hurt revenue payers which will always be workers due to political reality and taxing feasibility.

I would assert that we got a small taste of this in the 70's when war debt and commodities inflation caused a similar stagflation. Your model shows that as simple modest growth, but that wasn't the experience for many. The other part of the fiscal settlement of the 70's was that business HATED Carter for his responsible policies.

Politically, responsible, honest people can't get elected regularly. It took utter humiliation of America after our desperate exit from Vietnam, the cravenness of Watergate and the Church hearings to get someone like Carter. And, Washington HATED the best president we've had since Ike. Responsibility doesn't get votes. We won't correct our course. We won't get good effective legislation. No where in the legislative process is crafting the most efficient and eloquent law possible the goal, it has no supporters or lobbyist. We're in an adversarial system and sophistry rules the day. This empire will bust up on the rocks of Reductio ad absurdum with improbable directness. Bankruptcy looms for the US. As you know, those hours, days, years delaying the declaration of bankruptcy are the most painful and erratic. That quite honestly scares me. Because when the torches come out no one is gonna listen to some economist.
Design, Not Choice
written by Matthew G. Saroff, April 27, 2010 3:20
Actually, the ECB has not "chosen" not to print money, it's forbidden to do so by design.

The ECB has NO responsibility to maintain employment. It's a German/Monetarist construction which is charged solely with keeping inflation down.

It's what the Germans wanted, and I wonder what's going to happen when the other members discover that this requires dismantling their social safety net.
Oh Washington Post..
written by Nick B from DC, April 27, 2010 4:45
Wow, sometimes I just have to laugh. You could practically (and some days you seem to) spend your entire blogging efforts just correcting the Wash Post. I became fed up with them a while back. Yet people wonder why newspaper readership is in decline...

The Post should hire you as their editor, at least for economic reasons, you seem to be doing it for free already ;)

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.