At the risk of looking like I'm having a
conversation with myself, I want to elaborate a little on economic policy and its ability to limit or stimulate growth.
Chapter 1 of your Introduction to Macroeconomics textbook tells us that the total product of a nation's economic resources can be represented by a formula that looks like this:
GDP = C + I + G + X
Gross Domestic Product equals consumption (what everyone bought) plus savings (what everyone invested in) plus goverment purchases (what the government bought) plus net exports (what we sold to other countries minus what we bought from other countries).
This simple form of GDP computation is an elegant way to account for all the money everyone and everything in the economy earned, because it keeps track of everywhere that money was spent. Now, national crack sales will not be included in GDP, but what your crack dealer bought would be. Your piggy bank and what's under your mattress obviously wouldn't count, either.
Every economic policy that the government sets forth is to tweak these four variables to manage economic growth. Everything you hear about the stimulus is simply how the government hopes to allocate the various parts of GDP to increase GDP.
Scenario 1:If the economy was healthy--people were working, saving money which could be given out as loans for new businesses, college educations, home ownership, cars, etc, we'd probably see a economic growth rate of say 5% per year.
GDP = $10,000 = $7,500 + $1,500 + $1,500 - $500
Everything's healthy. The markets are great, supply is keeping pace with demand, prices are remaining stable. Why change anything?
GDP (next year) would be = $10,500 = $7,750 + $1,650 + $1,700 - $600.
Holy shit! We are spending more money this year than we did the last, because we had more money to spend. Our economy grew, so we are richer. We're saving a little bit more money, the government gets more tax money to spend on getting re-elected, but our net exports decreased because we're getting more affluent, and we're buying
more shit like Volkswagens and Colombian coffee beans. That VW dude that was in
Fargo and
The Big Lebowski and motherfucking Juan Valdez are fucking ecstatic. Everybody loves America! You know life is good when you get mad props from a sadistically criminal, nihilist hipster AND a motherfucker and his donkey. This is especially true considering that we've probably killed some of their ancestors over the past century or so.
Scenario 2:But let's say our economy wasn't so healthy. Say a lot of that consumer spending came from credit, and people have maxed out their credit cards, so spending has to go down. In a recessionary period, you'd see something like this:
GDP (this year) = $10,000 = $7,500 + $1,500 + $1,500 - $500
GDP (next year)= $9,950 = $7,100 + $1,750 + $1,500 - $400
Our GDP actually went down (that's what recession means--negative economic growth), more people were out of work, so they spent less, people tend to save more, government spending was flat, and our stuff becomes cheaper to people in other countries, so they buy more of our shit, and remember, we're buying less anyway, which combines to reduce any deficit in net exports. Juan Valdez has to sell his youngest daughter to a cartel as a drug smuggling mule and VW guy converts to radical Islam.
The situation will not be better the year after, so our GDP for the year after will look like this:
Forecasted GDP (two years from now) = $9,000 = $6,500 + $1,350 + $1,350 - $200
Oh, motherfuck. Our economy will totally tank next year. Down 10% from where we started. People are spending less, they're paying rent from their savings, they're not providing enough tax revenue for government to spend to re-elect itself, and they're not buying shit from other countries, and other countries now cannot afford to buy anything from us at all (worldwide gross for George Lucas' next travesty will dip below $4 trillion).
So, if you're the boss when your economy is in the middle of a recessionary period, what do you do? I'd hope you say that the easiest way to grow the economy is to decrease our trade deficit--in other words, increase net exports. Who the fuck wants to see a minus sign on their balance sheet? That's hard to do because that cheap shit at Wal-mart is pretty attractive compared to more expensive domestic alternatives--provided we still make that shit stateside, VW Touaregs kick ass, and we use more oil than we can pump out of our national parks.
Also, it's important to note that, at least historically, our dollar remains relatively strong in economic bad times, whereas in less stable countries like Colombia or Germany, Marxists or charismatic Austrians tend to take over and nationalize everything, making their money worth shit.
But, if you're real sharp you'd also notice that if the government spent more, your economy would grow! So you increase your expenditures, and maybe pay for some of that with taxes on imports and borrow the rest. Let's pretend you just want to get back to $10,000, so you raise tariffs a few percentage points, raise government spending a bit, and borrow what you can't pay for with your tax increase.
GDP = $10,000 = $7,250 + $1,250 + $1,800 - $300
Consumers aren't spending as much as they were before the recession, but it has improved. More people are back to work, either working for the government or working for companies that make shit for the government. They're not saving as much either, which means that there will be less credit flying around for people and businesses to borrow. Your governmental purchases are up, mostly to pay for shit like welfare which more people need. That's all paid for by increased taxes and debt. Debt innately sucks because you have to pay it back with future earnings, earnings which would, you know, grow the economy later. Your tariffs made imports more expensive to buy, so consumers either gave up their import, or found a domestic substitute (again, creating a marginal increase in consumer spending). Lucas isn't assassinated by the VW guy or Juan Valdez, who are too busy trying to find food, assuming they haven't died of exposure in their failed invasion of Russia, or malaria from bushwhacking through the rain forest in search of their abducted daughter.
So, your GDP growth is flat, your people are not spending like they want to, they're not saving like they should, and they've given up the coffee. The only thing keeping your economy from a recession is using the government plastic for things like food stamps and bombers. But for right now, you're better off than you were if you did nothing. You've beat the forecasted GDP by $1,000, by only going $300 in debt.
GDP multiplier effect, bitches!
I know, I'm pretty shitty for giving you the basic algebraic formula for GDP and pulling some calc shit at the last minute to save the day. C, I, G, and X are actually functions, and as such can be fucked with by calculus. I really am sorry for fucking with you, though, but the important point here is that each portion of GDP affects every other part, to varying degrees.
Anyway, you did have to take out a $300 debt, which you will have to pay back. And this is the tricky part. There's two point to make here. First, debt robs you of future economic growth. If you spend tomorrow's dollar today, you're just transferring that future wealth to a sooner date. If you are really good at this shit, you'll grow the economy faster than the interest rate, and that debt is worth less and less as a percentage of GDP. This is what republicans believe will happen all the time. Which is not true. But that's a discussion for a later date.
But I digress. By borrowing enough money to spend yourself back up to the $10,000 level of GDP output, you've bought your economy time to recover. You'll probably have to spend more money to fix whatever got fucked up in the fundamentals, but for right now you've stopped the bleeding. Taking on a little government debt to keep bad things from happening is not a horrible idea. You remember the equation above showing economic growth, your people can still consume and save more in a growing economy while still being able to increase government spending to pay off that $300. Their quality of life will still be increasing even if they have to pay off the government debt through increased taxes/reduced services. That's an important point, because you tend not to get re-elected if you fuck up people's quality of life.
When something happens to the GDP, like, say, everybody falsely claims that they have money they don't have, and spend like it, when the bill comes due and nobody can get paid, the economic can quickly snowball out of control, as businesses can no longer operate efficiently. I tried to show in the recessionary GDP and recessionary GDP forecast. The immediate effect of an economic shock is a decrease in demand for everything. People put their money in their piggy banks, and under their mattresses, and buy crack to cope with it all, and then with nobody buying anything, people get laid off, and it snowballs into a huge thing. Which is why George Bush told you to go shopping after 9/11. If people don't keep spending, then the government has to step in and spend for them through deficit spending to give everyone a chance to calm the fuck down and feel comfortable spending again.
So, if a little bit of governmental deficit spending has the ability to turn your economy around, you may ask, why not put $18 trillion on the government plastic and grow our ass faster?
Marginal returns, bitches! Government spending has to be low enough for the economy to absorb it, but high enough that it actually takes the place of enough consumer spending to be worth the effort. Since you know your economy can handle $10,000 (GDP at year zero), you know you can keep GDP at that level through the prudent use of government debt, without creating unsustainable growth through debt spending. It doesn't matter if C or G does it, spending on plastic artificially increases demand, which is unsustainable. You run the risk of plowing the country back into a recession once the plastic runs out, and this time, G will have to be bigger at the expense of C and I, which nobody likes, because unless you derive your happiness from helping the Pentagon buy $28,000 toilet sets, most of your happiness comes from C & I. You have to pick the right infusion of money, through government spending, in batches small enough that the economy can absorb it and grow in a sustainable way.
The whole point of economic policy is to control the level of economic growth. To retard demand when it elevates prices to the point that too many people are priced out of the market. To stimulate when markets are down.
You enter a recession when you try to cheat the GDP formula with policies which allow unsustainable demand. Allowing for markets to overvalue things that people buy will add to the GDP in the short run, but decreasing demand in the long run--decreasing C to below what it was before you created your sucker growth! Fucking up my standard of living! You cocksucker!
So, we're clear. Now, I've been writing for a long time without really even getting to my point. The title of the post is "moron, you failed economic policy." So let me show you some nasty-ass economic policy nudity, which may or may not be snuff.
I'll skip some of the historical shit which becomes more and more debatable as events fade into the past (fucking Republican revisionist bullshit usually does a great job of hazing shit up). Basically what happened was that the government was looking at GDP at the tail end of the dot com boom (bubble), and so these senators were standing around saying things like "Damn, that's some busted ass shit." Kneejerk reactionaries otherwise known as conservative republicans said FUCKING TAX CUTS FOR RICH PEOPLE STAT! And banks were like, "You know, government, you are so fucking good at economic policy, that we'll never have another depression again, will we, baby? It turns me on when you say 'fiscal.' I think that is so, so fucking attractive how you did all that. I think maybe you and I could get together after you retire from your senate seat, don't you want to get all up into my board of directors baby? $970,000 a year to play golf and vote yea 4 times a year? Would you like that, baby? Gosh, you're so big and strong and smart that you don't need ALL of that lil' ol' Glass-Steagall Act, do you? I mean, schnookums, that law was written when the government was little ol weakling democrats, and you are strong, strong republicans. I mean they didn't even have computers then. And we would never want to make you mad or be untrue to you. We just want to grow the economy. Just give us a little deregulation, and cross our heart, we promise we'll increase GDP by 2.5% a year. I'll even testify under oath to you that housing prices will never go down! Let us merge our teeny tiny commercial banks with our investment institutions. Maybe sell each other some of our debts as investment opportunities? What do you say, sugar? You wouldn't want to disappoint me, would you now, honey?"
And, with a wink and an playful elbow in the ribs by a president who drops his pants for intern hummers, Congress repealed the provisions of Glass-Steagall that prohibited commercial banks from acting like investment banks, and vice versa. And guess what those companies did? They wrote mortgages to anybody who wanted one, and then sold those mortgages to other companies and Norwegian pension funds in the form of securities. Fuck, man. It was brilliant. Trillions of dollars were pumped into consumer spending. Housing prices went up, which meant that if you got one early, you had a lot of fucking value of your house--for no fucking reason at all other than dumb luck--that you could borrow against to buy shit like plasma TVs and whole pages of the Pottery Barn catalog. And everybody was busy at work making deals with the Chinese for importing plasma TVs and Pottery Barn furniture, that we were fucking set. Unemployment dropped below its natural rate. Inflation was kept in control even though we bottomed out interest rates. And the government was like, holy shit, we've got so much GDP now that I can totally fight two wars, do it poorly and over like 100 years, create entitlements on the gold card, while spending like $1 trillion a year on other shit like developing a vast network of telecommunications eavesdropping equipment, and the quality of life isn't flattening. Holy shit! Fuck! Shit! Have a check for $300! Elect me! Have another check! Elect me again! Holy shit!
And what was happening was that housing prices, because of easy access to credit, were artificially inflated. Pretty soon too many people were priced out of being able to afford a home, even at very low interest rates. Demand flattened, then dropped. Prices flattened, then dropped. Suddenly the house you were able to take out $650,000 mortgages on, were only worth $150,000. Why the fuck would you pay $1.2 million in total mortgage payments for a house worth $150k? Fuck that! Foreclosures everywhere. Construction and development stopped. People were laid off. Financial companies who had stocks filled with these bad mortgages failed. More people were laid off. Housing prices continued to fall. Construction material prices fell. Commodity prices fell. Norwegian pension funds failed. The stock market tumbled, people looked at their 401(k) and shot their dog for the pelts. Banks need to keep a certain percentage of assets (savings) for what they give out as credit. Those savings were in the form of mortgage securities. Banks were over leveraged. They couldn't give out any more credit. The Treasury says to Congress, this is all your fault. Give us $700 billion, no questions asked, and we'll try to fix your fuck up. Congress walks out to the podium under the dome and says, slowly and solemnly, "I had no idea it was this bad," and forks over $700 billion without even asking what the Treasury was going to do with it. The Treasury gives the money to the thieves who started this mess in the first place, who promptly steal the money. Republicans lose power in the election. The financial institutions, who 10 years ago had their tongue in the Senates' ear, no longer return their calls.
We can reserve the official right to wig the fuck out when the number of working Americans contract. We can flip out and do crazy things when return on capital is stagnant. When George Bush talks about how the fundamentals of the economy are strong, that's what he's talking about. Those are the real fundamentals. Our manpower, and work more efficiently, continues to increase. This probably won't happen for forever, but for right now it's ok. There is nothing the economy cannot handle except bad government. And, unfortunately, that is what we have seen for at least the last decade.
The whole point to this, is that you cannot cheat the GDP. You have to make informed decisions on how each component of the GDP is operating, and what the sustainable level of growth will be. And then you have to act rationally based on this information, which a lot of smart people collect for you. The tough part is to get government to act rationally on the information they already have. Creating another bubble to help alleviate the effects of a previous one is not sound policy. If it isn't punting the ball down the field to a future administration, it's at least trying to attempt a 78-yard field goal on second down because they've shut down the pass and you don't have confidence in your run game. I'm not sure which metaphor to go with, but there's definitely a kicking-type motion of some sort involved here.
