Deficits again have value

Not so long ago, influential Republicans such as speaker of the house of representatives Paul Ryan (Paul Ryan), regularly made apocalyptic warnings about the dangers of budget deficits, arguing that the crisis in the Greek script was very close. However, now those same politicians are obviously quite satisfied with the prospect of growth of the deficit because of tax cuts: the budget resolution, which they are currently considering, by their own estimates, will increase the debt by 9 trillion dollars over the next ten years. No problem.

This sudden change especially not surprise anyone — at least anyone who has common sense. All this rhetoric about the deficit were obvious nonsense designed to tie the hands of a democratic President, and it was quite predictable that the mask of politicians, responsible Finance, will disappear at once after returning a Republican to the White house.

However, the fact that the Republicans will cease to feign their concern about the budget deficit in a time when deficits will again become important, was less predictable.

Those apocalyptic warnings still sound silly: America, which borrows in its own currency and thus can’t spend the cash, absolutely not similar to Greece. However, significant deficits have ceased to be harmless — not to mention the fact that they are extreme junk.

How it was. Eight years ago, when the economy was in free fall, I wrote that we have entered the era of “depressed economy”, when the usual rules of economic policy lose their value and when virtue turns evil, and prudence becomes folly. In particular, then to support the economy needed deficit spending, and attempts to balance the budget could be devastating.

This diagnosis — which was agreed to by the majority of professional economists did not come out of nowhere. It was based on a proven macroeconomic principles. Moreover, the predictions that were made on the basis of these principles was correct. In the period of economic decline that lasted several years after the financial crisis, government loans contributed to the increase in interest rates, money printing by the Federal reserve system of the United States has not led to inflation, and those countries that tried to reduce the deficit, faced great recession.

But these predictions were always conditional and could be applied only to an economy in which there is no hint of full employment. That is the economy inherited from his predecessor, President Obama. But the administration trump Putin’s coming to power in a time when full employment in the country will be more or less restored.

How do we know that the country has almost no unemployment? Low official unemployment rate is only one of the indicators. From my point of view, much more persuasive are the following two facts: wages have again started quickly rise, indicating the return to work of their market power, and the speed with which workers leave their seats — which is a measure of confidence in their ability to find a new job — has returned to its pre-crisis level.

What changes when we approach full employment? In essence, the government starts to compete with the private sector for limited amount of money. This means that deficit spending ceases to serve as the economic engine, because it causes a rise in interest rates and displaces private investment.

Now, government borrowing can be justified if they serve an important purpose: interest rates are still very low and at low rates loans for investment in the necessary infrastructure — is a very good idea, because it will increase productivity and because it can serve as a kind of protection against downturns in the future. But although, as a candidate, trump talked a lot about increasing government investment, there is no reason to believe that the Republicans Congress are going to make these investments a priority.

No, they are going to increase the deficit, reducing taxes for the rich. It will not help to spur the economy or create new jobs. In fact, displacing investment, it is to a certain extent, will reduce economic growth in the long term. Moreover, it will make the rich richer, while the reduction of social spending makes the poor poorer and weakens the position of the middle class. But this is the meaning.

Again, none of this threatens economic disaster. If such a catastrophe happens, it will happen because other solutions such as return to the old system of financial regulation, or due to some external shocks, such as, for example, the crisis in China or in Europe. And, because these things happen from time to time, and a lot depends on how the us government responds to them, we should be concerned that a future administration listen to the economic advice of people who in the past were constantly wrong.

But let’s get back to deficits. It’s not what the Republicans before was a hypocrite. It is important that their hypocrisy has made us poorer. They shouted about the inadmissibility of debt at a time when the more significant the deficit could bring us some benefit. And now, when the deficits can cause us serious harm, they readily consent to enlarge them.