The Great Macroeconomic Divide: Austerity vs. Stimulus

(NOTE:  Those who follow this blog and receive posts automatically need to go to the web site in order to see topic pages listed horizontally across the top.  Clicking the red/white box to the upper left on posts will get you to the web site.)

My last post was mostly a pointer to the topic of Governomics listed above and (if you hover over that) the sub-topic of Dealing with Debt, meaning our national “debt”.  The core issue I wanted to bring up was the sharp divide between academics/researchers on the issue of what helps and hinders the growth of an economy (made all the more complicated by globalization).

National-Debt-GDP

National-Debt-GDP (Photo credit: Wikipedia)

That split underlies and informs the split in congress over budget issues and plans to stimulate the economy thereby cementing gridlock.    Some believe our growing debt is our biggest fiscal problem and must be dealt with right now.  Others believe that our biggest fiscal problem is a weak economy with high unemployment that would benefit from more government stimulus money.  They believe we should wait to tackle the debt issue until the economy is stronger.  Paul Krugman is the best known advocate for the latter view.   

Those who emphasize the danger of debt also tend to warn of the danger of the Federal Reserve bolstering the financial system by injecting money at low interest rates, rates that austerites argue will eventually go up to more standard levels of five or six per cent….which will force much bigger interest payments on our burgeoning debt.   Altogether a debt time bomb.

As mentioned on my Governomics page above, until very recently, austerity preachers often suggested the tipping point of debt to GDP would be around 90%, basing it largely on a study by two Harvard professors Weinhard and Rogoff (a per cent that seems extra scary as we are now at about 75% and climbing).   But now that study is under fire because other researchers have found errors or questionable judgements in it, initiating quite a pie fight among economists.

All that is really a preamble to this.   Swedish economist Anders Aslund, a defender of austerity, has written a defense of Weinhard-Rogoff in which he calls those who critiqued his study “vicious”, an accusation that Paul Krugman takes issue with in his April 22 blog post;  Very Sensitive People.   Reading Aslund’s piece and Krugman’s response will  provide insight into the nature of this stimulus vs. austerity debate, which is raging in Europe as well.

Actually, if you click the Krugman link above, you’ll see at least three posts more recent than “Very Sensitive People” in which he also battles with his foes, shedding more light on the arguments between them.  In one of them, Krugman lashes out at Robert Samuelson for his suggesting in his The End of Macro Magic that current macroeconomics is a mess, pointing out that Samuelson’s sources were those who have proven themselves regularly wrong.  Needless to say, Krugman wasn’t one of them.

While Krugman has well respected allies who share many of his opinions, such as fellow Noble prize winner Joesph Stiglitz, he is the most incessant in making his p0ints and spares no feelings when challenging those who preach austerity and tight money as the combined path out of these hard times.

In short, he remains in the center of the action, which is why I often refer to him in my posts.   That and, from what I can tell, he makes a good case for his positions.

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U. S. Economy Slows to a Standstill: THE SKY IS FALLING!

No it’s not.  Economic  growth did shrivel to slightly less than nothing in

Economist letters

Economist letters (Photo credit: viralbus)

the fourth quarter as reported Wednesday, which surprised most everyone.   But it must have put smiles on the faces of  Obama haters throughout the land.  See we told you so!   As is so often the case, a closer look reveals a different picture.

According to various sources several factors came into play.   Reuters sums up the main downward drivers this way:   “If it were not for the hit from slower inventory growth and the deepest plunge in defense spending in 40 years  (*1.), the economy would have grown at a respectable 2.5 percent rate. In addition, economists said Superstorm Sandy, which struck the East Coast in late October may have reduced GDP by about half a point. “

So, that accounts for 3.0% of our lost growth  and you can learn a bit more about other factors if you click the link to Reuters above.  Or you could just accept the conclusion of  Mark Zandi, chief economist for Moody’s Analytics. “I don’t really read anything into the number…  I don’t think anything has fundamentally changed in the economy.”

That’s not good news, but it is not such bad news, either.  In addition, according to the Washington Post:   “Economists also cautioned that Wednesday’s report was the government’s first crack at measuring economic activity in the fourth quarter and that the data are often revised.   An updated report is slated for release Feb. 28, and many economists predicted it will be more upbeat.”

Not among that number is Steve Ricchiuto, chief economist at brokerage firm Mizuho Securities:   “The preliminary number is negative,” said Steve. “But the recovery is supposedly gaining momentum. Sorry, I don’t see it.”

And in the weeks ahead we might encounter some rough fiscal waters in the form of  Sequester and Debt Ceiling battles in Congress.   In pondering our economic Titanic slowly  sputtering forward amidst the swells, I recall a quote I like:  “Pessimists are cowards and optimists are fools.” (*2.)

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(*1.)   Business Insider offers a striking chart  depicting what they call a “Jaw-Dropping Decline In Military Spending That Clubbed GDP” (this comes compliments of reader MB).

(*2.)   This expression was often stated by a little known German philosopher, Heinrich Blucher, the husband of the much better known political theorist, Hannah Arendt, who both escaped Nazi Germany.  I also like the expression:  “While the pessimist may prove right in the end, the optimist has more fun along the way.”  I combine them into:  Hope for the best but plan for the worst.  Not that I always follow my own advice, of course.