A Debt Crisis or a Jobs Crisis?

Wednesday, June 9, 2010 at 9am
By John Friedman

Debate is heating up, pretty much to a boil, about whether our goose is just about cooked because we have too much debt, or whether our goose is just about cooked because we have too much unemployment.

Well, at least everyone agrees that the goose is in the oven . . .

* * *

It’s rather a balance sheet vs. income statement debate, isn’t it? Or you could just cut away the facade and lay it at the door of the class(ic) conflict that imbues our politics, our emotions, our perspectives and our beliefs: capital vs. labor, labor vs. capital.

As usual, the lefties side with labor and the righties side with capital.

So the lefties argue that we need to increase employment, which will (a) improve the government’s money-in/money-out situation (because employed people pay more in taxes and take fewer government support dollars than unemployed people) and which would (b) also increase consumer spending (because employed people spend more than unemployed people), and which would thereby (c) make up for the aggregate demand shortfall that’s the hallmark of a weak economy, all of which would (e) increase GDP.

And, they say, to increase employment, we need to have the government spend more in the short term, to prime the pump of aggregate demand, and then, once employment improves sufficiently, we can throttle down and attend to the deficit (because the increased employment replaces the loss to GDP resulting from lower government spending).

The righties argue that we need to decrease our deficit because our high level of debt is going to result in high inflation for a multitude of reasons, e.g., because government borrowing increases demand for loans, which increases interest rates, which then filters higher costs throughout the entire economy and increases the cost of doing business, and because the government, via The Fed, funds the deficit by increasing money supply a/k/a/printing money. They therefore argue that we need to cut government spending to reduce the annual deficit and ultimately our cumulative debt so that, voila, inflation stays low.

I’m not all that sure what they say about unemployment. Again, I have a harder time making the right’s arguments. Maybe, as some say, it’s not on their radar?

At any rate, we are at about 10% unemployment overall (12% in CA). 10% is a tragic number for all of us, and a tragedy of an existence for the tens of millions of folks who are unemployed or under-employed folks, and for those who are parts of the immediate families of those folks.

A quick numb-crunch shows that we’re talking about something like 50 million folks — 50 million folks living in a tragedy of unemployment.

So how did I get to that number? Well, let’s start with the government’s figure of there being 20 million people or so out of work. And then let’s assume that each one of those people has, on average, a family of 2.6 people — that being some oft-heard number in demographics (though I think it might be the number of kids a family had in the 1960s . . . ). That’s 52 million people living in tragedy, and that’s equal to s the populations — every child, every woman and every man — of New York, Chicago, L.A. and the Bay Area combined — plus Miami and DC.

This unemployment stuff is tres serious stuff. There is much suffering in the land — more than usual, and by a lot.

* * *

Now, for argument’s sake, how’s about we assume that both arguments are equally as to whether our goose is cooked due to unemployment or due to high debt (even if they can’t peacefully and/or logically and/or factually coexist).

Where does that lead us? I mean, should we then err on the side of reducing unemployment (with increased inflation), or on the side of reducing the debt (with lower inflation)?

I, for one, would be happy to see more inflation if it also meant that 20 million more people would be able to sustain themselves, together with the 36 million or so spouses and kids in those newly-employed people’s families. That’s a whole lot of improved happiness (not to mention a whole lot of improved financial health, which is, after all, what this blog is all about).

And if that increased employment were to go hand in hand with interest rates and inflation rates going higher, in lock-step together, a lot of folks out there who have big chunks of their money-stored sitting in cash and the like would be quite happy, because they are all currently crying out for higher interest rates and more cash flow on those money-stored chunks.

And I would venture that they would be happier with higher interest rates even if their improved cashflows were immediately offset by higher prices — because it would just be so much better psychologically to have 3% inflation and 3% CDs, as opposed to 1% inflation and 1% CDs.

That’s human nature. Adding and subtracting machines we ain’t; intuiting and emoting machines we is.

And if interest rates were to increase more than inflation (which, from here, is quite possible, because from some perspectives we currently have negative real interest rates), then those with CDs as their main money boat-floater in retirement would see their increased cashflow not entirely offset by higher prices, and they’d be numerically better off to boot.

But wait: there’s more. If inflation were higher, people would spend more, which in turn would give the economy a much needed boost, and require less government spending to get aggregate demand back up.

That’s right: inflation makes people spend, and spend right away, because they know that prices are going up, so why wait for another day?

Deflation does just the opposite: it makes people delay spending. Just think about real estate, where deflation has been the norm for years, and many predict might be the norm for another three (or five or eight . . . ). How many people are chomping at the bit to buy buy buy real estate? And how many are waiting for prices to fall further, or to at least stabilize?

Now apply that to everything. Kind of scary isn’t it? Of such things lost decades are made.

By contrast, inflation looks like a walk in the park.

With higher employment and a bit of inflation, then, we very well might see a nice surge in aggregate demand, which in turn would increase employment, etc. Why, ‘fore long, we could have a healthy economy.

All we need is to take the first step, which might well require some more temporary stimulus to help people get back to work — or, at least, no de-stimulus, which is what Greece et al. are looking at right now, perhaps rightfully so (another blog entry that . . . ) and which the G20 seems to be thinking the entire globe should do as well.

I mean, isn’t putting on the brakes before hard times are vanquished pretty much what happened in the 30’s to turn some terrible years into a decade’s worth of The Great Depression? And didn’t Japan just go through a Lost Decade because it ended up in a deflationary-spiral environment, partially as a result of its government going austere at the wrong time?

* * *

So what does all this have to do with your overall financial health?

We’re talking macroeconomic theory here, which is the theory of large economic systems, such as countries and economies and currencies. More specifically, this piece is all about one of the central debates in macroeconomics, both now and pretty much over the last 70 years (The Great Depression being the great defining moment of macroeconomics), which also happens to lie at one of the principal right/left divides, i.e., the role of governments generally, and the role in governments in helping economies manage economic cycles specifically.

Being theoretical, the practical application of this piece has to do with you smartening up your mind. Smartening up, as an end in itself, can help to improve your overall financial health because you will better understand the external environment out there — the sea upon which your financial health floats and bobs and weaves, tossed about by what is going on out there.

* * *

So how to smarten-up?

The macroeconomics I’ve learned recently I learned via several sites that I read every day, and which I recommend to you.

I have already mentioned Krugman. Reading PK every day will take no more than five minutes (ever once in a while longer), and will smarten you up bigtime. Find him here.

A more investing oriented, but still lefty, site (a very rare combination, as the vast majority of investing folks are righties) is The Big Picture blog, by Barry Ritholtz. Find him here.

A more renaissance-man/liberal arts’y approach (his topics are all over the place, and just about always quite interesting) abounds at Paul Kedrosky’s site. Find it here.

* * *

Now am I saying that getting smarter about macroeconomics will help you predict the future macroeconomic situation?

No.

I am not a big believer in even a certifiable genius being able to predict future macroeconomic events, let alone normal people. And, as to those who says they can so predict, I suggest that you ask them how well they predicted the current euro problem, plus the last two bubbles plus The Great Recession, etc. Because if their predictions are useful, they have to do better than a random guess would do; they have to be right a lot, not just as to the event, but as to the timing of the event.

And when I hear of people not only making these predictions, but also then basing their financial heath decisions on those predictions, it strikes me as resting those decisions on superstition, magic and alchemy.

Instead, I’m a big believer in making financial health decisions that assume that the external world out there is unpredictable, and are based on that assumption.

As in, give me the wisdom to know that which I cannot control, and to accept it for what it is.

* * *

But I am saying that smartening up on this stuff is good for you as an end in itself, and that it can also help you improve your overall financial health, over the very-long-run, via you helping like-minded smart people achieve positions of political power (yes, that would be the very long run side of things, and that means voting every chance you get).

Because if you believe in The Big Us — that we are all in this together, that someone else’s woes are our own (which I believe to be a very lefty mindset — remember how Obama got slammed for using the word empathy and how Bill Clinton parodies of the past always included the line I feel your pain) — then you might also believe that having your unemployed brothers and sisters find work is more important than having a near-zero inflation rate, and you might also come to believe that we can have low inflation and great employment figures, while also keeping the long-term debt ultimately in check. Yay.

So, yes, let’s do take the goose out of the oven, and let’s focus on getting that nasty unemployment rate down, shall we?

‘Til tomorrow then, here’s to your financial health and may it continuously improve.

1,407 words.

◄ Back to Blog
Categories:
Tags:

Leave a Comment

Name
Email
Website
Message