Saturday, August 02, 2008

From Bad to Worse

Given : The Economy Stinks.

How bad is it going to get?

image

From FireDogLake:

Reduced employment, reduced business investment, reduced consumer credit in all its forms.

These things have a cascading effect—they all reduce spending, whether business or individual spending. Each time spending is reduced, another business reaches the red line and goes out of business, or it has to lay off unproductive staff, or it orders less goods from its suppliers who do one of the two. As all those people are laid off they cause a reduction in tax revenues (payroll, property, income) and they start spending a lot less. That leads to businesses being under even more pressure and the logical thing for them to do is to... cut more staff. I'm sure you see where this is going.

It's a self-reinforcing vicious spiral. It is, actually, a huge part of what made the Great Depression as bad as it was. Now, the correct response to this is twofold—you clear the private books, and you maintain demand. As Keynes noted over 70 years ago, what that means is that when private actors can't spend, the government should.

This doesn't mean boondoggles, the Roosevelt administration had almost no fraud, literally magnitudes less than that which takes place routinely these days. It doesn't mean not slashing programs—in fact slashing programs which don't either provide relief or significant demand is very important so that money can be freed up to do other things. And it doesn't necessarily mean running huge deficits, in fact, at least at the Federal level, it is entirely possible to balance the budget with a series of cuts and tax raises on corporations and the rich (it certainly makes little sense to allow oil companies to reap all the benefits of oil prices increases, since they are not caused by management—unless of course, oil executives want to argue that they were responsible in front of Congress? Hmmmm?)

I don’t know about you all, but this scares the bejeebus out of me. You know things are in the tank when not even a government job is safe. Buy inflation-indexed bonds, and stuff your mattresses.

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