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Sunday, July 31, 2011

It's Gotten to Where I Can't Turn on the TV

Or the radio, or look at news on the Internet. The reason, of course, is the debt ceiling “negotiations.” I think Calculated Risk is correct that the debt ceiling will get raised on time, but I don't think it is inconceivable that the Tea Partiers in the House could screw things up.

I know Paul Krugman is right that negotiations are in la-la land where the negotiators are talking about cutting government spending when the economy needs more demand. How do I know this? Because elementary macroeconomics tells us so. It's the most basic equation in macroeconomics: Y = C + I + G + (X-M). In English, national income (gross domestic product) equals private consumption plus investment plus government spending plus net exports. If you reduce government spending, you reduce GDP, all other things equal. And right now, with companies sitting on trillions of dollars in cash, government spending is not crowding out private spending and investment, so cutting government spending really will reduce GDP.

The losers from those government spending cuts will be middle class and poor people. With Social Security, Medicare, and Medicaid all potentially on the chopping block, the cornerstones of middle class economic security are under assault (and it's a self-inflicted wound for Democratic negotiators, starting with the President, to allow this). Reduced GDP means that unemployment will go up even faster than it already is. It's a multidimensional defeat for the middle class unless, by some miracle, a clean debt ceiling increase passes.

Who wins? Perhaps the biggest group is what Paul Krugman calls the “rentiers,” individuals “who derive lots of income from assets, who lent large sums of money in the past, often unwisely, but are now being protected from loss at everyone else’s expense.” These finance types benefit from low inflation, which maximizes the value of the interest they receive and the assets they hold, so they fight any policy which might increase inflation enough to expand the economy and reduce middle class debt loads. I'll have more to say about who wins and who loses from moderate inflation in a future post.

I hurt my head every time the debt ceiling gets discussed, from banging it against the wall. I wonder if I can self-nominate for the Order of the Shrill.

Wake me up on August 3rd.


  1. And would a little context hurt? I have yet to hear a single story about the national debt that even mentions that all of the long term debt projects are so awful because the US spends twice as much on healthcare as any other industrialized nation in the world (and with worse outcomes!). It’s not as if those costs and the burden they place on the economy vanish because they get shifted off of government and onto the poor and elderly.

  2. You're absolutely right. The data show that government in the US spends more than many countries spend in total on health care on a per capita basis. Then there is an approximately equal amount of private health care spending here.

    In my poverty post, I showed that health care inflation is far above the overall inflation rate and, as you say, that is driving the projections on Medicare costs in the future. I also touch on this in today's post on health care.

  3. Paul Krugman was also right in 2003 when he labeled the Republican Party as a Revolutionary Force, that has no desire to negotiate or work within the confines of the United States Government as we know it, but instead they wish to tear this country down to parade rest and then remake it in their own image. Everything that *That party has gotten behind has helped chip away at our social safety nets, and our infrastructure. While I don't blame them for every ill, right now I do blame them for most every immediate issue that plagues us as a nation economically and socially.