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Wednesday, January 30, 2013

Austerity, Spending, and the Stimulative Value of Holes

Construction sign shows man digging hole
An Associated Press article out today could be titled, "Everything Republicans say About Economics Proven Wrong." Instead, we get the less entertaining but just as accurate, "US economy shrinks 0.1 pct., 1st time in 3 1/2 years." If that doesn't sound like good news, that's because it is not. Even a minor contraction in an already deflated economy is enough to cause real worry, like a creaking support beam deep inside a coal mine. But one tenth of one percent isn't exactly a plunge into the danger zone and -- good news! -- we know exactly what caused it. Which means, we also know exactly what to do to fix it.

The U.S. economy unexpectedly shrank from October through December for the first time since 2009, hurt by the biggest cut in defense spending in 40 years, fewer exports and sluggish growth in company stockpiles. The drop occurred despite stronger consumer spending and business investment.

The Commerce Department said Wednesday that the economy contracted at an annual rate of 0.1 percent in the fourth quarter. That was a sharp slowdown from the 3.1 percent growth rate in the July-September quarter.

Economists said the drop in gross domestic product wasn't as bleak as it looked. The weakness was mainly the result of one-time factors. Government spending cuts and slower inventory growth, which can be volatile, subtracted a total of 2.6 percentage points from GDP.

The Reader's Digest Condensed version: austerity sucks. Government spending is the dreaded s-word (i.e., "stimulus") to the US economy. If you cut federal spending, you cut demand, and the economy suffers. Duh.

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In fact, it's more than just defense spending cuts that are holding economic growth back. After all, defense spending isn't magically good, while other spending is somehow bad. Demand is demand and if you cut spending, you cut demand -- every time. It's inevitable. Non-defense discretionary spending is at a historic low. The Center for American Progress reports that this spending covers things like "crime prevention and investigation, border protection and immigration enforcement, the federal prison system, and U.S. attorneys and the federal courts, including the Supreme Court." So not wasteful spending in the least.

When we cut all that, we undercut the economy. It's simple: cut government spending and someone, somewhere stops getting paid. They stop spending their money and this sends a ripple effect throughout the economy. They no longer demand products and services -- and everyone on down the line demands fewer as a result. Again, the perfect word to describe the inability to understand this basic and obvious truth is "duh."

Which makes the Republican Party, conservative pundits, and rightwing media the Duh Brigade. And this report puts them all in a little bit of a pickle.

"It’s awfully tempting to argue for a delay in the defense sequester on 'stimulus' grounds -- if you are the kind of politician who hasn’t abundantly estopped any such argument with prior shrieks about deficit spending being the economy’s main problem," explains Ed Kilgore.

But of course, logical inconsistency is never an impediment to the conservative mind. They'll find some way to explain how defense spending is magically good and that money somehow knows it's being spent "the right way." But keep in mind the way the economy really works. They can't really come up with a convincing argument. Economist John Maynard Keynes said you could stimulate the economy by paying someone to dig holes and someone else to fill them in again. And this is absolutely true. The point being that spending is stimulus and it doesn't much matter what kind of labor that spending buys. Think about it; when hole-digger and hole-filler break for lunch, they still head to a burger joint. The money spends exactly the same as if they'd earned it painting bombers or manufacturing Humvee tires.

The point here isn't to advocate wasting money and that wasn't Keynes' point either -- he wasn't seriously suggesting a program of hole-based economic recovery. The point here is to demonstrate the very simple principle that income is income and money doesn't care how it's earned. If we raise defense spending, that's stimulative. If we raise non-defense discretionary spending, that's stimulative. If we pay people to walk around with signs reading "ask me where you can get a job holding one of these signs," that's stimulative. Money doesn't know things. It has no memory of how it was earned. Every federal dollar buys the same amount of burger, which means every federal dollar is as stimulative as the next.

This is all very obvious, which is why conservatives spend so much energy in obscuring it with crazy economic theories that seem to make a lot of sense -- right up until the moment that you really start to think about them. And that's why today's report is doubly bad news for the GOP: a contracting economy is bad for everyone and a report blaming austerity for that economy is bad for the right.

Today will be an extra-heavy spin cycle day, I think.

-Wisco

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