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Home Publications Blogs Beat the Press The Economy Is Far Too Simple for Economists to Understand #47,654

The Economy Is Far Too Simple for Economists to Understand #47,654

Monday, 21 April 2014 06:57

The Wall Street Journal noted that this recovery is about to pass the average duration for post-war recoveries with no recession clouds on the horizon. The piece also noted the weakness of the recovery and that the unemployment rate is higher now than at the same point in any prior post-war recovery. This weakness is treated as a source of mystery.

Of course arithmetic fans have no difficulty explaining the weakness. In the last business cycle the economy was being driven by the housing bubble. This led to record rates of housing construction (measured as a share of GDP) and record consumption, with the savings rate falling to near zero. Now that the bubble has burst housing has fallen to below normal levels due to the overbuilding of the bubble years and consumption is closer to normal levels, albeit still unusually high relative to income.

What did anyone think could fill the resulting gap in demand? The government sector could do it, but the balanced budget cultists will not let the government run large deficits. Investment is not going to spike to record highs in a weak economy. The trade deficit could close to fill the demand gap, but that would require a sharp fall in the dollar which we have not seen.

In short there is nothing surprising about the weakness of this recovery. The only aspect that is surprising is that economists seem surprised.

Comments (8)Add Comment
Simple Math
written by Paul Mathis, April 21, 2014 10:13
Even the simpletons at the WSJ should be able to figure this one out:

In the worst previous post-WWII recession under Reagan, the unemployment rate over 4.5 years dropped 42% from its peak of 10.8% in 11/82. Over the same time period under Obama, unemployment dropped 33% from its peak of 10% in 10/09.

The difference is the result of taxes and spending:

Under Reagan taxes as a percentage of GDP declined from 18.6% in 1982 to 17.9% in 1987, while under Obama, taxes increased from 14.6% in 2009 to 17.3% (est.) in 2014. In the same time periods, spending under Reagan declined from 22.5% of GDP to 21%, but under Obama, spending plunged from 24.4% of GDP to 21.1% (est.).

So Obama massively reduced federal spending and massively increased taxes before the economy had recovered -- just the opposite of what Keynes would have done. Reagan was much less anti-Keynesian in his economic policies and therefore got better results.
Why don't they fix it?
written by argeec, April 21, 2014 10:19
"The government sector could do it, but the balanced budget cultists will not let the government run large deficits."

So why doesn't anyone care? Why doesn't Obama care? All it would take is an act of congress. The government could get everyone back to work with a decent wage. It could arrange that students could afford college without massive debt. It could provide affordable health care to all.

But Obama won't say so. The major news media won't say so. Why? Because plutocrats would lose status, and they can't bear the thought. And our politicians are too craven and egotistical to oppose them.

So plutocracy owns all this country's major institutions to the extent that none of them will present the solution to our problems. It has pretty much always been that way but never more so than today.

Until enough people protest, it will stay that way.

US Trade Deficit
written by Tyler, April 21, 2014 10:41
The United States trade deficit is only $40 billion.
Failure to Strike at the Root
written by Jesse, April 21, 2014 1:10

Has the US thoroughly reformed those distortions and abuses in the financial system that caused, and benefitted from, the tech bubble and then the housing bubble?

No? Only a fool or a madman would expect a different outcome from any stimulus or program that continues to rest upon such a corrupted platform of distribution and allocation of wealth, no matter what the source.

This is the great weakness, the failure to strike to the root of the problem.
Congress is the Score Keeper for the Dollar
written by Robert Bostick, April 21, 2014 6:24
The reality of Federal monetary operations is that Congress mandates the spending for all Federal programs and then spending occurs through the Treasury keystroking reserves into recipients’ accounts. Where do those reserves come from? They come from the Federal Reserve, of course, which has the delegated authority from Congress to credit reserves into Treasury accounts.

When, where, and why does it do this? The main trigger events are 1) tax and FICA contribution revenues, 2) sales of Treasury securities, 3) credits from coin sales and deposits at the Fed (coin seigniorage), 4) sales of Federal property, and 5) return of Fed profits to the Treasury.

Tax and FICA payments cause the Fed to credit Treasury Tax and Loan (TT & L) accounts with reserves. Treasury coin sales and deposits at the Fed cause it to credit the Mint’s Public Enterprise Fund (PEF) account with reserves, and Fed profits and asset sales cause it to credit other Treasury accounts with reserves. So that’s how reserves get into what might be called Treasury income accounts."

Source: Joe Firestone, http://www.nakedcapitalism.com...atism.html

Since all of these reserves result from the government having first spent dollars into the economy, it is an axiom that the federal government must first spend before it can tax or sell bonds.

That means the government can never involuntarily become insolvent. The deficit scolds of course have it all backwards because they are locked into gold standard rubrics.

Moreover, they have been cynically subversive about Federal deficits. Peterson and his ilk will never admit to the American public what they know to be the cold facts about 'Federal Deficit Spending.' Namely, that where ever there's a deficit there's a surplus. In the instance of our public sector deficit the surplus can be found in the non-public sector or the private sector. And, adjusting for net imports our private sector receives net financial assets from deficit spending on a penny for penny basis. It follows then that a $17.2 trillion deficit is equal to the same amount in net financial assets in the private sector. Where else would the dollars flow after adjusting for imports?

All one need understand is the simple Accounting 101 identities in sectoral balances.http://goo.gl/0WsYZ
It is not just a failure of arithmetic
written by Michael, April 22, 2014 12:32
It is not just a failure of arithmetic, but a failure to understand basic macroeconomics and NIPA tables.

A basic understanding of macroeconomics will lead you to the conclusion that we have an Aggregate Demand problem. A basic understanding of the NIPA accounts will show that this is primarily showing up in I and G; the housing market and state and local government spending on goods and services.

While the housing market is anemically rebounding, there is an unprecedented decline in aggregate demand at the state and local level. Since many states have balanced budgets laws, particularly tied to their operating budgets, they needed to slash public employment without any assistance from the federal government.

We have experienced an unprecedented contraction government spending on goods and services and an unprecedented loss of public employment, particularly K-12 teachers.

This is not rocket science. If we used deficits to simply rollback the fiscal drag we would be approaching employment.

Unfortunately, we have seen a lot of bad economics over the past few years, and even worse policy making. Our Congress is captured by ideological deficit hawks who have no problem inflicting unnecessary harm onto America if it helps the regain political power. Their personal self-interest comes before the nation's interest.

Our current depressed economy is by choice. It is self-inflicted, and it certainly does not have to be this way.

Our cyclical problems could easily and largely be remedied by rolling back our austerity measures and investing into infrastructure.
written by Jim, April 22, 2014 4:48
Zumbrun is a journalist who, despite his undergraduate degree in economics, is unqualified to address the issues:


I'm an economist and fairly aware of the reasons for the anemic recovery, and feel that the disparagement of economists in general does a disservice to the debate over policy to address the problems. If we are to disparage economists, let's expose those who "sell" their bona fides that helps ideologues Koch-block progressive policy.
written by bananaguard, April 23, 2014 11:18
Tyler, in order for trade to be a contributor to growth, the size of the deficit has to decline, or turn to surplus. The absolute size at any given time tells you nothing about its effect on growth. The "real goods" trade balance over the past 12 months has averaged -$47.7 bln. Over the 12 months a year earlier, it was -$49.1 bln. That's a $21.6 bln add to GDP over 12 months - a rounding error against a nearly $16 trillion annual output.

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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.