FacebookTwitterGoogle+RedditEmail

Finance 202 Meets Economics 101

The Washington Post decided to give us “Finance 202” to tell us that tax cuts at this point in the business cycle are a bad idea. The gist of the argument is that the economy is approaching full employment, so there is little room left for further stimulus. The piece also tells us that because of increase indebtedness, the government will be less will positioned to provide stimulus to the economy in the next recession.

There are several points worth noting on this one. First, the Washington Post has no clue whether we are close to full employment right now. We know this because no one has a clue. The experts at places like the Congressional Budget Office (CBO) have been repeatedly proven wrong. Just four years ago, CBO put the non-accelerating rate of inflation rate of unemployment (NAIRU), the effective measure of full employment in conventional terms, at 5.4 percent.

The unemployment rate is now 4.1 percent with no evidence of rising inflation. As a result of the unemployment rate falling below CBO’s estimate of the NAIRU, millions of more workers have jobs, with the main beneficiaries being blacks, Hispanics, and less-educated workers. The tighter labor market has also allowed tens of millions of workers to get pay increases.

Given this history (we can tell the same story about the late 1990s boom and the mis-measurement of the NAIRU), how does the Post know that the unemployment rate cannot get down to 3.5 percent or even 3.0 percent? If this is possible, and we pursue policies that prevent the unemployment rate from falling (e.g. higher interest rates from the Fed or fiscal tightening by Congress) we will needlessly be keeping millions of the most disadvantaged from getting jobs and pay increases. Instead of the government fighting poverty and inequality, it will be causing it.

It is also important to note that we have already paid an enormous price for having deficits that are too small. We have needlessly kept the unemployment rate higher than necessary, with a cost to our children of a permanently smaller economy, to the tune of $1 trillion to $2 trillion annually. For some reason, the deficit hawks are never forced to acknowledge the enormous damage they have inflicted on the country.

The argument that the government won’t be able to have stimulus in the next recession because of the debt, ignores what is taking place in the world. Japan has a debt-to-GDP ratio of more than 200 percent, over twice the US ratio. Until recently, investors were paying the Japanese government to lend it money, as its long-term interest rate was negative in nominal terms. Japan’s inflation rate has consistently been near zero, although it recently has been inching up to its 2.0 percent target. In other words, there is little economic reason to believe that the US will not be able to finance stimulus in the next recession.

The Post piece does point to the political obstacles to stimulus, noting that only two Republicans voted for the 2009 stimulus. But the Republican opposition had little to do with debt levels. The big problem was there was a Democrat in the White House, as many Republicans, including Senate Minority Leader Mitch McConnell said explicitly.

This is not an argument for giving more tax cuts to rich people. However, the objection is that the money could be better used, not that the deficit is too large. Although there is one possible benefit to giving still more money to the rich after the massive upward redistribution of the last four decades; maybe they will explode.

This column originally appeared on Beat the Press.

More articles by:

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

Weekend Edition
August 17, 2018
Friday - Sunday
Daniel Wolff
The Aretha Dialogue
Nick Pemberton
Donald Trump and the Rise of Patriotism 
Joseph Natoli
First Amendment Rights and the Court of Popular Opinion
Andrew Levine
Midterms 2018: What’s There to Hope For?
Jeffrey St. Clair
Roaming Charges: Running Out of Fools
Ajamu Baraka
Opposing Bipartisan Warmongering is Defending Human Rights of the Poor and Working Class
Paul Street
Corporate Media: the Enemy of the People
David Macaray
Trump and the Sex Tape
CJ Hopkins
Where Have All the Nazis Gone?
Daniel Falcone
The Future of NATO: an Interview With Richard Falk
Robert Hunziker
Hothouse Earth
Cesar Chelala
The Historic Responsibility of the Catholic Church
Ron Jacobs
The Barbarism of US Immigration Policy
Kenneth Surin
In Shanghai
William Camacaro - Frederick B. Mills
The Military Option Against Venezuela in the “Year of the Americas”
Nancy Kurshan
The Whole World Was Watching: Chicago ’68, Revisited
Robert Fantina
Yemeni and Palestinian Children
Alexandra Isfahani-Hammond
Orcas and Other-Than-Human Grief
Shoshana Fine – Thomas Lindemann
Migrants Deaths: European Democracies and the Right to Not Protect?
Paul Edwards
Totally Irrusianal
Thomas Knapp
Murphy’s Law: Big Tech Must Serve as Censorship Subcontractors
Mark Ashwill
More Demons Unleashed After Fulbright University Vietnam Official Drops Rhetorical Bombshells
Ralph Nader
Going Fundamental Eludes Congressional Progressives
Hans-Armin Ohlmann
My Longest Day: How World War II Ended for My Family
Matthew Funke
The Nordic Countries Aren’t Socialist
Daniel Warner
Tiger Woods, Donald Trump and Crime and Punishment
Dave Lindorff
Mainstream Media Hypocrisy on Display
Jeff Cohen
Democrats Gather in Chicago: Elite Party or Party of the People?
Victor Grossman
Stand Up With New Hope in Germany?
Christopher Brauchli
A Family Affair
Jill Richardson
Profiting From Poison
Patrick Bobilin
Moving the Margins
Alison Barros
Dear White American
Celia Bottger
If Ireland Can Reject Fossil Fuels, Your Town Can Too
Ian Scott Horst
Less Voting, More Revolution
Peter Certo
Trump Snubbed McCain, Then the Media Snubbed the Rest of Us
Dan Ritzman
Drilling ANWR: One of Our Last Links to the Wild World is in Danger
Brandon Do
The World and Palestine, Palestine and the World
Chris Wright
An Updated and Improved Marxism
Daryan Rezazad
Iran and the Doomsday Machine
Patrick Bond
Africa’s Pioneering Marxist Political Economist, Samir Amin (1931-2018)
Louis Proyect
Memoir From the Underground
Binoy Kampmark
Meaningless Titles and Liveable Cities: Melbourne Loses to Vienna
Andrew Stewart
Blackkklansman: Spike Lee Delivers a Masterpiece
Elizabeth Lennard
Alan Chadwick in the Budding Grove: Story Summary for a Documentary Film
FacebookTwitterGoogle+RedditEmail