We shouldn't be talking about deficit reduction with 10.2% unemployment
There's a potential disconnect between the Obama administration, the unemployment rate and the deficit, and I hope there's some sort of resolution or else you and I could be looking at high unemployment for some time to come -- not to mention a backslide on the greenshoots and economic growth we're beginning to see.
The unemployment rate jumped to 10.2% last month, the first time unemployment has breached 10% since 1983. While monthly job losses are significantly declining since early this year, 10.2% is still a scary threshold.
Meanwhile, the president said something the other day that might be good news were it not for the fact that we're in a recovery and jobless numbers are still very high. He said, "The government is going to have to get serious about reducing our debt levels."
The only problem with that goal, historically, is whenever deficit reduction takes precedent over economic recovery, the recovery takes a hit -- and then, so do we. In other words, if the president and Congress begin to tinker with deficit reduction, history proves that fewer jobs are created and the GDP can actually begin to tank again.
It happened in 1937. Conservatives in the Roosevelt administration convinced the president that deficit reduction should be addressed, and so that's exactly what he did. The result was a very poorly timed hit to the economy just as it was climbing its way out of the Great Depression.
What needs to happen at this point is more spending. Perhaps even another stimulus plan. One that's laser-focused on job creation. My hunch is that the Obama administration will set about the task of achieving this in bite-sized chunks rather than one big stimulus package.
History, more than anything else, indicates that this is the only way to get to 7%-ish unemployment without disrupting the economy, which can more or less endure a large deficit. For now.
Reader Comments (Page 1 of 1)
11-10-2009 @ 8:50AM
redshirt said...
Please read this book: Economics in One Lesson by Henry Hazlitt. Deficit spending pushes prices higher than they should be. This means everyone will be paying more for things than they would if the free market was left alone. Subsequently, any jobs creation attempted by the government is canceled by the unrealistic cost of living. This keeps the cost of starting projects higher and reinforces the cycle of cost cutting, aka lay-offs. This is especially bad during a credit crunch brought on by the central bank (and maintained by extending higher interest rates to the banks to hold their excess reserves).
If government pays things off via direct taxation, then the link is even more obvious.
Also, deficit spending and the Fed keeping the rates low forces the dollar down, which obviously makes it more difficult to import capital goods that are needed to start job creating projects here. Moreover, it is yet possible to use the weak dollar to invest in "risky" overseas projects using the "carry trade". In other words, deficit spending does not help job creation in the US.
Finally, I recommend you take a look at some better history books. The history has been skewed by socialist thinking. I recommend going to mises.org and looking over all their books on the Great Depression. Government made it worse and made it last much longer than is commonly understood. (The stock market for instance did not recover fully until something like 1954. The standard of living through WWII was sub-par at best.)
Your ideas are just not jiving with reality.
What needs to happen is we need to get to rock bottom as fast as possible, so we can reallocate resources at realistic price levels as soon as possible. There is money to spend on the sidelines, just no incentive to to do so. Lower prices reduce risk of investment for money earned at an earlier inflated rate.
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