30
May
2011
O’Driscoll on Cheap-Money Policies
I spend so much time reading Krugman et al., that occasionally I need to come back up for air and breathe the sweet oxygen of Gerry O’Driscoll (HT2 von Pepe).
I spend so much time reading Krugman et al., that occasionally I need to come back up for air and breathe the sweet oxygen of Gerry O’Driscoll (HT2 von Pepe).
His talk reminded me of Adam Smith’s saying that there’s a lot of ruin in a country. I think its true in two senses: it takes a stretch of bad policy to reach the point where a country has to default, and defaulting isn’t the end of the world. I believe Japan has a debt around 200% of it’s GDP, aroound zero interest rates, and the same entitlement problems as the US but people aren’t really talking about them facing a default or severe inflation. Since the US has a larger economy and the benchmark Triple-A security (a joke I know), I think that the US will have to go way beyond where Japan is right now to face a default or severe inflation. It would take a very sustained period of completely nonsensical policies to put the US in Greece’s position. That said it’s always better to face reality sooner. The best policy for the US would be to keep the debt ceiling where it is and make due with current revenue and selling off government owned assets while making the spending cuts necessary to run surpluses every year. Its not gonna happen, but I don’t see any doomsday scenarios playing out either. The US economy will probably be mediocre for the foreseeable future.
The US economy will probably be mediocre for the foreseeable future.
Indeed, because the deficit is too small to restore aggregate demand, and not rising the debt ceiling will only make things worse since the private sector is still deleveraging and keep unemployment higher than it could be.
The US will never be in Greece’s position. Greece has surrendered its monetary sovereignty and thus faces a real constraint. The US only has a silly self-imposed constraint: the debt ceiling. It can only default if it chooses to. Like in Japan, the debt level per se is of no consequence for interest rates and inflation.
Government debt does nothing to solve unemployment. Do you wanna debate theory or numbers?
Government spending can solve unemployment by hiring anyone willing to work. Is that theory or numbers?
We all know that Keynesian-induced unemployment can be reduced in the short run by additional unsustainable Keynesian programs. Why don’t you know that?
Hayek:
“The tax cut again aims at increasing aggregate demand and the present difficulty is not due to a deficiency of aggregate demand. It is due to the fact that without continued inflation, you cannot maintain the people in the new employments in which they have been drawn by the inflation of the past.”
http://mises.org/daily/3311
Every single government job had to be funded with money taken from the private sector. Due to the inefficiency of the public sector, waste involved in the transfer of funds, and incentive distortions from higher taxation, these jobs are net losers. Funding through inflation is only steals purchasing power from some groups and transfers it to others; also a losing proposition on net. It would be easy to solve unemployment through coercion, but the only way to improve living conditions is to increase the amount of capital invested per person.
Just out of curiosity, if $1.6 trillion (about 4 times larger than the then record set in 2008) is too small how big does the deficit need to be? It seems like all of you guys say the deficit is too small but never specify how big it should be. would it be a good idea for the government to go out and run a $100 trillion deficit?
As large as needed as long as it’s not inflationary.
We have inflation now with these teeny tiny all time record deficits. So how high is too high for inflation and how big of a deficit would create too high inflation? It seems like you guys have no idea how big these numbers should be but we are supposed to bow to your will?
If we end up running $1trillion deficits and get high inflation then you will have to admit you don’t know what you are talking about, right? I mean how could a $1-2 trillion deficit result in high inflation if you are right and those deficits are too small?
We’ve always had inflation, haven’t we?
Is that your response to my questions? If so, I’ll take it as another thing to go with stagflation that you have no answer for.
Here’s my guess at the answer. The deficit must be large enough to fill “the gap” when the “equilibrium level of aggregate production” falls short of what could be produced at “full employment”.
“The gap” is conceptually a bunch of nonsense because any alleged trend line to determine “the gap” was based upon an unsustainable price, investment and capital structure due to prior Keynesian-induced malinvestments.
Jonathan Finegold Catalan explains why government spending is bad economics:
http://mises.org/daily/5123/Government-Spending-Is-Bad-Economics
That would’ve been a better answer than what I got.
I’m at a loss to see what you find interesting in this. It’s a rehash of much of what has been appearing in the financial press for months with no particular useful insight. I don’t even know what his point was.