As we await the resolution of the Great American Stick-Up, the unfortunate bit of information that came out yesterday turned the entire talk in Washington into an open farce, as if it wasn’t already. The new revisions from the Bureau of Economic Analysis on GDP from 2007 to present reveal several things. First, the economy sank into a near-depression as a result of the financial crisis, with output plunging much further than initially expected. Second, the economy never truly recovered. The stimulus package returned it to a kind of equilibrium, but that has mostly all dissipated by now. What is left is an demand gap – a gap that idles able bodies and reduces potential economic output.
The central economic problem of the moment is the gap between what we could produce and what we are producing. It is not the budget deficit, the debt, nor is it the absence of either a balanced budget or a Balanced Budget Amendment. It is not too much spending nor too high taxes.
It is the gap between how much the economy could produce and what it is producing…between the number of people who could work and who are working […]
Excess capacity…output gaps…below potential. They’re dry words, but what they really mean are millions of people, unable to do what’s so important to so many of us every day. Go to work. Provide for their families. Take a vacation. Send a kid to a cool camp. Save for the future. Repair the house. Take a course. Buy a nice outfit. Go out for dinner. Get ahead. Build stuff. Invest in stuff. Create stuff.
And all this “potential output”…it’s lost forever. You can’t go back and make it up. You can only try to get back on track ASAP.
That’s the simplest explanation for what we’re facing right now, and we know precisely how to fix it – by creating more demand. You need to run higher deficits right now, because it’s the only major actor that is wiling or able to spend. Consumers aren’t spending, businesses aren’t investing, exports aren’t booming. Without governmental action, we will stay in this unsatisfying stasis, a recovery-less recovery. [cont’d.]
Yes we know that we have a Congress that refuses to fix the problem, and is instead determined to do harm. When you decrease demand, you decrease GDP, and you decrease the potential for job creation. That’s it. People want to make this more complex than it is.
What’s more, the deficit debate is completely disconnected from another simple equation – your deficit cannot go down unless more people are working and paying income tax. The debt-to-GDP ratio, the headline indicator as far as fiscal stability is concerned, will not go down if GDP doesn’t expand quicker. And the truth is that we don’t have a debt problem. Debt service is historically low.
Because of those low rates, the amount the U.S. government pays to service its debt is, relative to the size of the economy, less than it was paying throughout the boom years of the 1980s and 1990s and for most of the last decade. The Congressional Budget Office estimates that net interest on the debt (which is what the government pays to service it) would be $225 billion for fiscal year 2011. The latest figures put that a bit higher, so let’s call it $250 billion. That’s about 1.6% of American output, which is lower than at any point since the 1970s – except for 2003 through 2005, when it was closer to 1.4%.
Under Ronald Reagan, the first George Bush, and Bill Clinton, payments on federal debt often got above 3% of GDP. Under Bush the second, payments were about where they are now. Yet suddenly, we are in a near collective hysteria.
This entire issue is manufactured. We have an economic crisis in America – it’s a jobs crisis, and by reducing spending in the middle of it, we’re only fixing to make it worse. And ultimately, this is why America is in a state of frustration and anxiety. They see their leaders in Washington walk past simple solutions to move the country forward, and instead embark on overhyped hysteria and wrongheaded resolutions, ultimately ones which benefit the richest members of society at the expense of everyone else.
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