Friday, January 21, 2011
- Ironic Economics
Liberals don’t get economics because it’s not as simple as they are. “If people are poor” say liberals, “then lets take money from the rich and give it to them.” It has a ‘let em eat cake’ sort of simplicity and elegance, so they put no more thought into it than that. But when they follow through on their plan, it hurts the character of the poor by making them dependent, and it hurts the rich because they could otherwise do productive things with the money that liberals are wasting making the poor dependent. It’s an old story really.
For liberals this is really standard fare. But that isn’t to say that there aren’t some economic issues which are so counter-intuitive that they defy popular instinct for conservatives as well. Tax rates go down and revenues go up; conservatives typically understand that where liberals don't. But I’d like to call attention to a few others which seem to be a bad idea in principle (and in fact probably are in most cases) but in reality they will only help us given our present situation.
The first is inflation. We are conditioned to hate inflation, and rightly so in the broadest sense. But “some” inflation right now would actually firm up our global position and make a complete collapse of our system less likely not more.
A ‘collapse’ of the American system can only come from a crisis event. The scenario envisioned by most is a run on Treasuries which causes the Fed to support the bonds, and that subsequently causes a run on the dollar. But if we let some level of managed inflation occur, then the thing that will rise most precipitously if food. Nowhere in the world does food represent a lower portion of the average wage than in America. It’s really our last area of total global dominance.
So as food prices rise across the globe, it will destabilize the emerging market long before it begins to affect stability in the US. That will mean that if a liquidity crisis were to occur in the capital markets for whatever reason, people will be more likely to run toward the US dollar instead of away from it. In other words, allowing a degree of ‘managed’ inflation will reinforce the US market in comparison, and make a total collapse less likely.
The second is the ‘bail out’ for the states. Several states have problems which can’t be solved by normal cuts in spending and management of tax rates. I feel like I’ve discussed why ad-infinitum, but if Rip Van winkle is reading this, it’s their pension liabilities which are doing it, and it’s the bluest highly unionized states that are in trouble.
The first conservative reaction to the fiscal distress is shouts of ‘let em default’. Austerity and personal responsibility are watchwords of the conservative movement and are important to the 'Tea Party' as well. Even the House of Representatives is considering a resolution against any 'bailout' for the states, and if it’s adopted, it will all but guarantee that someone somewhere will be entering the legal limbo of state bankruptcy.
But to give more evidence to the axiom that the first instinct isn’t necessarily the best, that ‘let em default’ emotion is precisely the same one held by most liberals. Default, under the present law, means the bond holder only. And according to liberals, it's they alone who should be asked to take the hit. “We have a contract" they say "and that must be honored come hell or high water.”
But if if they are, then not only will services have to be slashed dramatically, laying off union staffers in the process, but taxes will need to be raised enough to kill whatever economic growth we’re expecting. And forcing the default on the bondholders exclusively will also make it impossible for the states to borrow money in the future at anything like a reasonable rate. Some aggregation of capital is necessary in government, so a greater portion of future taxes will have to go to debt service than is currently the case. If this happens, then very little government is about to become VERY expensive.
There are steps being taken to change the law – and the real solution will be a negotiated settlement of all parties involved. But it’s ironic how the conservative instinct for fiscal austerity will only aggravate the problem. The thing that conservatives will typically strive for – a growing economy and rising market with stable prices – would be best achieved with some level of federal assurance for the financial markets. It can even probably be managed without any real dollar cost to the taxpayer. But both liberals and conservative are in open revolt over the prospect.