Free Markets, Free People

Deficit Spending – Pimping The Great Lie

When the NY Times entitles anything, especially an editorial, starting with “The Truth About …”, you should be immediately suspicious.  As Arnold Kling says, that normally means “The liberal elite narrative about …”.  And it’s editorial, “The Truth About The Deficit” is no exception.  The first part of the editorial is spent on a selective history lesson which makes all of our troubles, as you might imagine, something brought on by the GOP’s focus on tax cuts for the wealthy.  Nevermind that they were across the board marginal cuts – this narrative won’t die.

The entire bit of revisionist history (with the normal “blame Bush” tautology) is aimed at justifying this paragraph:

Americans should be anxious, for reasons including the huge deficit. But the cold economic truth is this: At a time of high unemployment and fragile growth, the last thing the government should do is to slash spending. That will only drive the economy into deeper trouble.

What the NYT and the Krugman’s of the world believe is government spending can be substituted for private spending and have the same result – economic growth. And that economic growth, spurred by this spending, will create jobs. But if you think about it, unless the government is buying goods and services produced by the private sector, that’s most likely not going to happen, is it? Temporary jobs located in “infrastructure improvement,” unemployment benefit extensions and jobs “programs” don’t create jobs. Private sector growth does. And when government is borrowing .40 cents for every dollar it spends, it starts to dry up the private credit market. That means if there is a desire to expand, the credit isn’t as readily available as it would be if the 800 pound credit hog weren’t in the market.

Then there’s this:

To truly tame deficits will require serious health care reform …

To which Kling replies:

In Washington, serious health care reform means “fixing” private health insurance. But our deficits are caused not by problems in private health insurance. They are caused by the structure of Medicare and Medicaid. That is where we need reform. But the Times and other liberal mouthpieces need to create a narrative that makes it sound as though unsound government programs are the fault of the private sector.

Spot on. This has been the most irritating part of the “health care reform” issue. It is the public programs – which neither party will touch – that are breaking the bank, yet we continually hear politicians on the left talk about “greedy [private] insurance companies” as the sole reason health care costs or so high. In fact, without private health care insurance to pay the difference, Medicare and Medicaid would have foundered long ago. But the point is the deficit problem is not one caused by private insurance.  It has no effect on public debt.  That is caused by the mismanagement of the government programs. And other than a passing wave at “stopping waste, fraud and abuse” – the promise of every politician since the inception of those programs, and accomplished by none of them – this “reform” package ignores the real problem while attacking the private market.

But back to the primary point of the NYT’s attempt to persuade you that deficit spending – massive deficit spending – is a good thing:

Here is an unpopular but undeniable fact of life: When private sector demand is weak, the federal government must serve as the spender of last resort. Otherwise, collapsing demand sets in motion a negative, self-reinforcing spiral in which lack of demand — for goods, services and new employees — leads to ever deepening economic weakness.

And here’s the undeniable economic truth about the snake oil they’re peddling:

The narrative is that we are suffering from a shortfall in demand. The reality is that the private sector has decided that workers should be hired on the basis of profits, rather than on the basis of debt. The government may choose to make a different decision, of course, but that will not necessarily strengthen our economy.

One of the many economists not at all in agreement – despite President Obama’s claim to the contrary – with the prescription that deficit spending is not only good, but necessary. And while they can blame the situation on anyone they choose, the decisions being made to run up this massive debt based on some pretty flaky economic logic are theirs and theirs alone.



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8 Responses to Deficit Spending – Pimping The Great Lie

  • Here is an unpopular but undeniable fact of life: When private sector demand is weak, the federal government must serve as the spender of last resort. Otherwise, collapsing demand sets in motion a negative, self-reinforcing spiral in which lack of demand — for goods, services and new employees — leads to ever deepening economic weakness.

    I notice something about liberal “facts  of life”: they are generally not only unproven, but also unprovable.  The idea that the government MUST spend (borrowed money) to keep the economy afloat in bad times is such an assertion.  What proof is there that this is true?  Answer: none outside the theses and op-eds written by liberals.  “I decree it!” is their only proof.

    Proof to the contrary, on the other hand, is pretty readily available.  It strikes me that, if government spending was the magic bullet of last resort, then economies which have large amounts of government spending / control (communist countries, for example) would never suffer any serious economic dislocations: unemployment would always be low, markets (to the extent they exist) would always be stable, goods and services would always be readily available, people would be happy.  Yet, we know this to be untrue.  If we exclude communist countries, we are still left with heavily socialized Europe, which is suffering through this economic downturn just as we are: there’s no bright light across the pond.  Even here at home, we look at California, mired in debt from massive, prolonged government (over)spending: far from leading any economic recovery, they are circling the drain.

    Yet, libs keep pushing this idea that we gotta bankrupt the economy to save it.

    Similar, unprovable liberal ideas:

    — Global warming

    — WoT makes us less safe

    — Barack Obama, John Kerry, and every other democrat to run for high office is an intellectual

    I’m sure that other people could add to the list.

    In effect, we are being governed by people whose grip on reality is less firm than that of an LSD addict.  And they complain that we are “ungovernable”!

  • The Times should just look in the mirror.
    They are running a deficit in their operations, but unlike their editorial, they have cut jobs and spending

  • The statist’s key to “fixing” Medicare and Medicaid is to reduce expectations. Currently the somewhat free market in health insurance offers coverage for any non-experimental coverage that your doctors believe necessary. This gets extremely expensive during the last year of life for a Medicare recipient. If they can change that paradigm  by efficiency panels, cost effectiveness studies,  and demonizing expensive new treatments, then they will finally (they believe) get a handle on the monster unfunded liability of Medicare. Of course, no statist turns down the opportunity to exert more power over the proles (for teheir own good of course).

  • “Otherwise, collapsing demand sets in motion a negative, self-reinforcing spiral in which lack of demand — for goods, services and new employees — leads to ever deepening economic weakness”

    Nonsense. The spiral is not endless. Even the Great Depression had a bottom, *before* all the government spending.

    Market economies, and I think we still qualify as such, have a natural equilibrium point. They also allocate resources quite efficiently all by themselves. Sometimes during periods of growth the balance may get out of whack for various reasons( e.g. the Tulip bubble, the dotcom bubble, the current housing bubble) but the system restores itself. Sort of a ‘two steps forward and one step back’ thing. Artificial (government) intervention distorts the market forces by misallocating resources (how many and what kind of infrastructure projects do we really need?). This wastes resources and prolongs the recovery process  .

    That’s my story and I am sticking to it.

  • I’d say that cutting government spending, etc., very close to the time that animal spirits are plunging would not be a good idea. Maybe now it would be.
    Note that California effectively did this with its “Friday Furloughs.” Fridays are now packed with state workers shopping and eating out. Hmmm. didn’t China create extra holidays to boost consumer spending?

  • I don’t think that anyone is fooled by that “fixing health care will solve the deficit crunch” canard.  You ‘fix’ deficits by reigning in spending so that the amount you spend is no longer greater than the amount you take in.  People are too cynical to believe that there is some magic bullet that will turn wasteful politicians into fiscally responsible ones, and after months of seeing how twisted the math on health care reform is, no one is going to believe that Obamacare has any hope of helping to control deficits.