The Numbness of the Aftermath

If you’re like me this numbness is actually soothing. It prevents the intrusion of the pain that otherwise would be there. This is my immediate reaction to the debt ceiling capitulation orchestrated by our leader. There is no point in my repeating myself. Let me say simply that I don’t like this deal. I don’t think it is healthy either economically or politically, and I don’t think we have seen the end of the far right’s hostage taking tactics. Far from it: we have only just begun to deal with it. By surrendering so abjectly we have encouraged them to redouble their efforts to impose their latter day libertarian, small government, cynically contrived evangelical, and anti-social views on the rest of us. We, who were happy with government intervention in the economy, as long as it was democratically ordained and focused on things markets are deplorable at delivering, have just been rolled over by a brigade of Randians. They hate government, and since our government begins and ends with “we the people” they must hate us also.

But let’s gather our wits and survey the aftermath:

One bright spot is that we have now entered a period of testing for non-Keynsian orthodoxy. Digest this quote – in Monday’s New York Times – from a certain Randall Kroszner, a University of Chicago professor:

“from an accounting point of view, it seems obvious that you would reduce GDP if you cut government spending. But the key is really the impact on consumption and investment. If you reduce government spending and if people think that reduces uncertainty about the tax burden down the line, they may be more comfortable with spending”

Could he hedge more? Talk about a declaration of the tentative nature of economics.

Setting aside the professor’s lack of courage in his theory, what he is telling us is that reducing government spending increases GDP because it clears up the mysteries of the great burden that government places on business and households. They then frolic amongst the flowers of market magic. Hey presto, what those dreary Keynesians think of as shrinking the economy is magically transformed into a gain. So austerity can produce wealth. All it takes is that market magic to be set free.

OK.

Let’s watch. Let’s see if that basic Lucasian line holds true. We should witness an extraordinary burst of activity now that clarity has been restored and naughty government reduced. Cue the confidence fairy …

While we are waiting we can talk about something sensible. Actual news.

This morning’s report on consumer spending was fairly miserable: consumption dropped 0.2% in June, the first such decline in two years. Plus incomes barely budged – increasing a miserly 0.1%. Even that increase is an illusion because wages and salaries fell. The increase was composed of higher transfer payments from the government – exactly the things likely to be targets of the austerity police. With consumption down and wages flat the savings rate rose to 5.2%, the high point for this year. This doesn’t look like an economy on the edge of a great leap forward. It looks very much as it has for a long while now. In a steady stagnant march to nowhere.

Oh, and the income figures included the news that inflation is very quiet too. The deflator for the consumption numbers – a measure of inflation at the household level – rose 2.6% in the last year, and actually fell 0.2% in June as the spring surge in oil and commodity prices made its way through to consumers. Even eliminating the volatile stuff like food and energy from the index only produced a negligible increase of 0.1%. Inflation is simply not a problem.

This news followed yesterday’s report from the Institute of Supply Management that manufacturing activity is declining. The ISM index fell to a two year low of 50.9% in July – any reading over 50% indicates growth, but July’s decline brings us all the way back to mid 2009 levels. Worse: the new orders component of the index is now below that 50% level meaning that prospective activity is declining for the first time since 2009.

This is shocking news, but was largely lost in the worldwide sigh of relief the debt deal produced. The economy is flat lining and all we have been talking about is a totally contrived crisis over a ceiling that Congress imposes on itself because it cannot trust itself with our money.

Remember that the entire ordeal was artificial. Congress was getting all in a lather over spending and revenue levels that it had legislated into being.There is no debt crisis: we are able to borrow at absurdly low rates. There are a multitude of ways we can organize to pay our bills. Some of them entail no debt at all. But, as we are all now painfully aware, this was never a discussion about debt. The modern Republican party has shown, as I am tired of mentioning, that it is all too willing to accept huge levels of debt. Anyone who voted for the Bush tax cuts voted to pile up debt. Ditto those who supported the Reagan defense budgets paid for with debt. And Dick Cheney’s words – “deficits don’t matter” – still ring in our ears. This was a fight about the role of government. It wasn’t a n argument about whether we could pay our bills or how to raise the cash to do so. It was about whether we wanted to pay the bills at all. It was fueled, in spirit if not fact, by the theory professor Kroszner advocates: government activity saps the strength of the private economy. According to him the aggregates that Keynes watched are only accounting entities, they are meaningless as theoretical constructs.

So.

The deal doesn’t hit us too hard immediately. I suppose that’s good. The cuts are postponed for a year or so. But they will arrive sooner or later. At which point they will weaken the economy and deprive a goodly number of our fellow citizens or cash, jobs, or support. It is this cynicism that upsets me the most. The crisis was started by the stupidity and greed of a small number of people and by a faith based attitude towards real estate. The subsequent implosion has shifted the burden of cleaning up the mess onto those who least can sustain it. This debt deal magnifies that burden. It avoids, scrupulously for now, involving those most able to help.

We have appeased the anti-social horde of libertarians once. They will be back for more.

Meanwhile the economy wallows. People suffer. Our wealth declines. And we expend our energy instead of fixing these things, on fending off hostage taking tactics over a bureaucratic device that should not even exist.

Our politics exposed as dysfunctional. Our economy abandoned.

As I said: the numbness is actually soothing.

Oh. We are waiting. Confidence fairy, where are you?