I’m not an expert in economics, but I am trying to make heads or tails of the growing debate over what to do about our economy.\u00a0 We’ve pulled back from the brink we were on early last year.\u00a0 But now we’re stalled. There’s a non-trivial chance we’ll fall back for a double dip recession similar to what happened in 1937.\u00a0 There’s also some chance the world confidence in the dollar will fall and we’ll go into full-blown collapse ala Greece.\u00a0 Then there’s a large chance we’ll just languish with 10% unemployment and be dead in the water like the Japanese were through most of the 90’s.\u00a0 Oh yeah, and there’s some small possibility we’ll actually get things humming along again so we can all see our 401k’s at 2007 levels and have lots of job prospects for us and our children.<\/p>\n
Many are calling for fiscal austerity, arguing that large deficits are the road to ruin.\u00a0 Many of those same folks are calling for the Fed to raise interest rates as a hedge against inflation.\u00a0 On the flip side, others argue that more government stimulus is needed and that we need to spend our way back to prosperity.\u00a0 Frankly it all makes my head hurt.<\/p>\n
Let’s start with the common ground.\u00a0 No one thinks deficits are a good idea.\u00a0 Most can agree that there are times where you borrow money to make appropriate investments, but that running deficits year on year without ever seeing the plus side of the balance sheet is not a healthy thing.\u00a0 As a minimum, I would very much like to see everyone remember this the next time we do have a thriving economy so that we actually raise taxes or cut spending such that we get to a debt neutral position.\u00a0 But that’s water over the dam now.\u00a0 The issue is figuring out how to get out of where we are.<\/p>\n
The austerity folks are fond of making the analogy of the U.S. economy to your household.\u00a0 That is, if you lose your job or otherwise are taking in less money, then you need to cut back your expenses such that you are also paying out less money.\u00a0 Responding to a layoff notice with a spending spree at Best Buy would be pathologically stupid.\u00a0 There’s additional rationale that if there isn’t a show of some fiscal discipline, creditors will lose faith in the ability to pay the debts and call the notes due.\u00a0 This would effectively result in bankruptcy.<\/p>\n
There’s an elegant simplicity to that analogy, but after careful consideration, I think it’s the wrong one.\u00a0 The major missing element is that in the home analogy, your spending doesn’t have a relationship to your income.\u00a0 But in the U.S. economy case, it does.\u00a0 That is, if people are broke, if goods are not sold, then there are no tax revenues to collect.\u00a0 But I think there’s a simple analogy that does reflect this relationship.<\/p>\n
Consider a small family business, let’s say a local Bar & Grill.\u00a0 The tavern falls on hard times because the factory up the road shut down and a lot of their regular customers no longer have lunch there or hang out there after work.\u00a0 As the owner, you’re faced with a significant drop in revenue.\u00a0 You have two basic choices.\u00a0 You can try and restructure your business to fit within the revenue you’re making, or you can borrow and invest in things to attract new customers.\u00a0 While there may be some things you can do to cut costs, many of the obvious things you might try will ultimately hurt your business.\u00a0 Reduce the variety and quality of the food menu.\u00a0 Reduce staff.\u00a0 Reduce hours of operation.\u00a0 Water down the drinks.\u00a0 Sure, these things save you money, but they likely will also cost you revenue as additional customers will become disappointed and leave.\u00a0 In general, this strategy is a death spiral.\u00a0 Alternatively, you could gather a few local investors to finance adding a stage on the back and offering live music.\u00a0 Do additional advertising.\u00a0 Hire a top chef to create an exceptional menu.\u00a0 These things have the opportunity to expand your business, and thus your revenue, which hopefully you’ll use to pay down your debt.<\/p>\n
Yet even in this analogy, it’s important to recognize that there are no guarantees.\u00a0 Yes, maybe in the austerity case you’ll get lucky and some new company will re-open the factory and your business will take off again.\u00a0 Yes, in the investment scenario you might make lots of improvements, and still nobody comes to your establishment and you go under with additional debt.\u00a0 The key difference for me is that the austerity case is entirely hanging your future on luck and prayer.\u00a0 It’s outside of your control.\u00a0 While the investment scenario gives you a path to drive your own success, or at least die trying.<\/p>\n
Bringing this back to the U.S. economy, it means to me that the federal government needs to keep investing.\u00a0 Not spending wildly, but investing smartly in things that have future upsides.\u00a0 Green energy technology comes to mind as a great industry investment.\u00a0 In general, loans to small businesses and start-ups.\u00a0 Unemployment payments to keep people off the state welfare rolls such that they prop up consumer spending so that larger companies stop hoarding cash and go back to investing in their own businesses.\u00a0 Not every program will work, but we need to keep trying.<\/p>\n
There is a time to be frugal, but this isn’t it.\u00a0 There is no indication this is a passing storm such that if we just hunker down we’ll be fine in a few months.\u00a0 The storm has already ravaged the town.\u00a0 We need to decide whether to rebuild or to decide to get used to living in the rubble.<\/p>\n","protected":false},"excerpt":{"rendered":"
I’m not an expert in economics, but I am trying to make heads or tails of the growing debate over<\/p>\n