osewalrus (osewalrus) wrote,

Why We Are More Screwed Than I Thought On Economy

Dueling op eds in the NYT between Krugman and Brooks now have me more convinced that our economy is doomed to an Argentine-like collapse for the next decade, even if we were doing everything right (and, given the likelihood that we will do lots of stupid wrong things because of fundamental ignorance about the economy by our electorate and elected leaders, that seems optimistic).

Oh, and fatlefty gets oodles of Cassnadrafruede and can say "I told you so."

Krugman starts by damning the policymakers at the Fed and in government for insisting that we are still in a "recovery," albeit a weak recovery. He wants them to wake up and start taking real action to stimulate the economy rather than try to paint a happy face on things.

Along comes David Brooks, who counters that Germany, which adopted what the US argued was a far too weak stimulus package in 2009 and shifted to austerity control of deficit spending in 2010, now has a GDP growth this quarter of 9%. While acknowledging that one quarter does not prove the case conclusively, he argues that what is needed is focus on proper fundamentals of the economy rather than quick stimulus.

The truth is actually much worse, and it is why we are so screwed. The idea behind Kensian stimulus/"pump priming" is the assumption that the economy freezes when economic collapse freezes the money supply. The government spending restarts the economy by stimulating sufficient economic activity to encourage banks to start lending and producers to start producing.

This actually worked in Germany as it was supposed to for a very simple reason. They have a real economic structure. We don't. Germany is doing well because there are lots of places in the world outside the United States that are also doing well: Brazil, Turkey, India, Indonesia and certain countries in Africa such as Liberia (three years of peace and slowly developing a real economy not dependent on export of raw materials). Germany manufactures things like heavy machinery, which these countries are buying to sustain their rapidly developing industrial base.

We do not have an industrial base. Part of the purpose of the stimulus was to help us develop new industries -- such as smart grid, clean energy, and broadband. But to the extent there was investment made in it, we are pulling it back. To pay for the latest round of unemployment benefits and aid to the states, the government eliminated several billion dollars in "non-obligated" stimulus funds. In economic terms, this is eating our seed corn.

It's possible that if we had adopted an appropriately sized stimulus package two years ago, we might be better off today. But one of this biggest problems was how long it took to build up the infrastructure to spend the stimulus money intelligently. The fact that we still have 2 billion of the 4 billion of broadband stimulus money in BTOP unspent is not because the people developing the program are stupid or lazy or inefficient. To the contrary, the effort to build up the current program capable of making intelligent grants was positively heroic. But 8 years of a government run by people who hate government left the infrastructure totally devestated. It had to be more than built from scratch. The entire technologic and bureaucratic foundation of how money is processed and spent needed to be torn out and rebuilt.

In any event, unless there is some industry out there of which I'm unaware, I don't see where our industrial base is going to come from. Which means we are pretty much screwed for the forseeable future.

And on that cheerful note, Good Shabbos.

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