Thursday, July 28, 2011

The President is teaching bad economics

President Obama’s speech Monday evening took the starch out of me. It was terrible to hear him deliver the conservative line and not even as ewell as they do. 
Everyone should know a little about economics and that’s all I claim to know, a few basics. In an earlier blog I tried to explain many ways in which private finances differed from those of the government. We all know that government can “print” money and households can’t. This difference has huge ramifications when we stop to think about it.
Perhaps the biggest difference is that households and firms try to make a profit. They save to accumulate wealth over time. Even state governments try to build a contingency fund for bad times. 
The federal government does not attempt to profit and has no way to save. It doesn’t need to because it can “print” all the money it needs. If it were to save, where would it put it? We don’t want government holding large amounts of stock in private firms. Hell, then Congress would try to run them. 
With a few moments thought, it should be obvious that government and private budgeting must be different.
Yet, our ill-advised President centers speeches around phrases like “the government must tighten its belt just like households do.” He must be getting his advice from Paul Ryan who says similar things with more conviction. President Obama is certainly not listening to his former economic advisor Larry Summers, who recently and belatedly wrote that the country needs a WPA project similar to FDR’s in the 1930s.
Early in his speech Monday, the President recited the following nonsense.
“Now, every family knows that a little credit card debt is manageable. But if we stay on the current path, our growing debt could cost us jobs and do serious damage to the economy. More of our tax dollars will go toward paying off the interest on our loans. Businesses will be less likely to open up shop and hire workers in a country that can’t balance its books. Interest rates could climb for everyone who borrows money – the homeowner with a mortgage, the student with a college loan, the corner store that wants to expand. And we won’t have enough money to make job-creating investments in things like education and infrastructure, or pay for vital programs like Medicare and Medicaid.”
He began with the government is like a household nonsense.
Then there is no way to save tax money. Government spending and taxation are separate functions. Government doesn’t need taxes to spend.
Our study of sector balances (here or here) has shown that a government that balances its budget in the face of private sector net saving (not spending) and foreign trade deficits will cause businesses to close as money is drained from the private sector and demand sags.
Obama is teaching the prevailing view of the day, which is out of date - to be kind.
To be less kind, this debt crisis is fabricated to induce enough panic that the polity will accept anything as a solution. Such a solution would be different from anything that would be concluded after public debate. Michael Hudson takes the less kind position. 

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