June 11, 2010

• What’s the Economic Plan B?

  In the United States we basically have two ascendant schools of economic thought. One is more or less Keynesian and the other is basically the Chicago school. Our government never actually does exactly what is prescribed by either of these schools but plots a course somewhere in between the extremes.

  Neither of these are fundamentally transformational economic ideologies. They are more like ideologies about how best for government to work with the system that we have in place now. And that makes sense. It’s far more rare for people to advocate changing a society from the ground up and to implement a new system. And after what was universally seen in the west as the abject failure of communism the whole idea of “start over” economic philosophies were strongly seen as dangerous and counterproductive.  That’s part of why economic discussions in the US sometimes don’t seem as broad as they do elsewhere in the world.

  In any case if I had to summarize the philosophies as quickly and simply and flatteringly as possible I’d do so like this:

  Keynesian:   The government should invest in their people and society all the time (through whatever means they have). But that is most important to do when times are tough and we are in an economic downturn or a recession.  Government investment can pull us out of the recession by stimulating the economy through encouraging consumer spending which in turn encourages business investment. But if Government is going to cut back, it should do it when the nation is prosperous NOT when the times are tough.

  Chicago:  The government should minimize its spending all the time (and every other influence it has on the economy). But that is most important to do when times are tough and we are in an economic downturn or a recession. Government dis-investment can pull us out of a recession by stimulating the economy through encouraging businesses to invest and hire which in turn spurs consumer spending. Recessions then will correct themselves automatically in the shortest time possible.  But if Government is going to increase spending, it should do it when the nation is prosperous NOT when the times are tough.

  Obviously these are super over-simplifications and I obviously altered the basic idea in order to create symmetry between the philosophies. But I think this gets at the essence of what the philosophies are about.

  Basically both assume government, as it is, is doing something somewhat wrong and needs to alter course a bit to ensure that we keep the economy strong.

  Both also have a Horror story to tell if their sage advice is not heeded.  And the horror story for both schools is almost identical.  Basically they describe the disastrous turn of events where government Deficits get too high but the economy continues to stagnate.  The downturn turns into a recession. The recession turns into a depression. Inflation runs amok. Unemployment is out of control. And everything generally just sucks.

  The details of how this suckage happens differs somewhat in each school but the details aren’t particularly relevant. The point is both say “if you don’t do what I say, we’re in for a WORLD of hurt!”

  Right now the Keynesians are telling a pretty drastic, though I think compelling, story of the possible future we might be heading for because Government are turning away from stimulus and running headlong toward deficit reduction.  The story goes Europe and China and the rest of the world are cutting back on spending to improve their bottom lines in the hopes that America will again become the spender of last resort for the whole world. The American consumer will again start over consuming like we did during the last decade or two and that will ultimately lead all these other countries to be able to cut back and improve their treasuries and eventually re-obtain economic security.

  Only one problem, says the Keynesians. The American Consumer isn’t having it any more. We aren’t going to prop up the rest of the world with our spending habits because our individual debt is too high, we no longer have the housing market as a crutch, and we’re generally fed up with the idea the US being the world’s piggy bank. And what’s more our government isn’t going to make up for that lack of spending especially not when the rest of the world isn’t on board too. In addition the anti-spending deficit-hawk forces in the U.S. are JUST as strong as they are everywhere else in the world and they are in the process of capturing our government. US consummer spending won’t increase like Magic so without government help it aint gonna happen.  So instead we’ll do the same thing everybody else does and cut spending and try to reduce our deficit.

  The end result will be a terrible race for the bottom where the main people who suffer are the people who find that these austerity programs invariably target the poor much more than the rich, reducing spending on social programs like social security and medicare and public education and postal services and what have you.  And in the end that race won’t actually solve anything.  Deficits will continue to rise and will even rise faster because the economies now don’t make any money and don’t produce anything forcing more deficit reduction and more cutbacks which in turn lead to lower production. Etc. etc. etc.  At each point int the cycle it’ll be increasingly difficult to use Keynesian strategies to pull ourselves out of it, but we better hope that we at some point see the light and change course.

  But if we don’t….well then you reach that doomsday scenario I spoke of before. Depression. Inflation. yatta yatta yatta. Only now the deficits are so high we no longer have the leeway to spend our way out of it. We’re totally screwed.

  So my question is… okay… so if that’s a seriously possible outcome…. what’s plan B? 

  That seems to me to be what members of neither school talk about very much. They talk a great deal about how to avoid the doomsday. But they don’t talk a lot about what to do if we FAIL to avoid the doomsday? 

  So is there a plan B? If we get to the point where we can’t increase spending nor can we reduce spending or interest rates or whatever in any kind of meaningful way that will pull us out of a nightmarish economic slump, is there an alternative? IS there a different strategy we can switch into to change course that will dig us out of a gigantic hole that we dug ourselves into at least until we can get back on track and start to engage in the proper Keynesian or Chicagoan or whateverian strategy that keeps us away from such problems in the future?

  Would we have to like convene a great meetings of nations and businesses where we all agree to like forgive all debts and start from scratch again? Or maybe we agree to try something different? We say screw capitalism, this shit doesn’t work any better than communism. Let’s put our best minds together and see if we can come up with something brand new that might actually create some long term stability. Or What?

  Or maybe we do nothing and things will slowly in like ten or twenty or fifty or a hundred years correct themselves on their own?

  Or is all hope lost? And we might as well grab ourselves a drink and await the impending Armageddon?

  Presumably we’d be in pretty uncharted waters for a global economy if this were to happen right? I mean we might have examples for smaller countries but not for the planet as a whole.  So does anyone even know what Plan B is? Has anyone even thought about it?

  Or are we all just praying that what we’re doing now will work or we’ll get lucky and things just aint as bad as they could be so that even if we screw up a lot we’ll still be more or less a-okay?

  • 2:39 pm
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