October 24, 2016

Economic ignorance is not bliss

Throughout this election season, I have been profoundly depressed by the extent to which politicians and so-called journalists lack even a rudimentary understanding of economics. Once we got past Bernie Sanders' simplistic sloganeering, we fell into a deep hole where (a) The economy was scarcely mentioned; (b) When it was mentioned, the premises were almost always false; (c) On the rare occasions when policies were discussed, the proposals were often nonsensical. (Aside: Sanders put his finger on some of the right problems, but in my opinion offered no practicable solutions.)

Example: D.J. Trump made a big deal of trying to repatriate $$ that US corporations hold overseas (they hope to avoid taxation). His thesis appears to be that if we just had more $$ here in the US, the economy would start humming. But this completely ignores the undeniable fact that we are already awash in money that cannot find productive uses, because demand is too weak. How do we know this? Just look at the prevailing market interest rates. The Right Wing likes to assert that these low interest rates exist only because "the Fed is favoring Democrats with a bubble" or some such drivel.

A more reasonable explanation is supply and demand. There is too much money available to lend, so the supply exceeds demand and no one will pay much interest for that money. So much for Trump's expectation that more cash would do wonders for our economy.

But why are we in this bind? Here's a powerful clue from the "velocity of money":

That's right, the money is moving less rapidly than it did at the very bottom of the Great Depression of the 1930s! The "velocity" measures  (to oversimplify) how often the money changes hands. Put another way,  there's plenty of money around, but it's not generating economic activity.

So why is this true? Basically it results from our extreme inequality of income and wealth. When ordinary folks get money, they inevitably spend most of it on their immediate needs, and put a little by for the future or a rainy day. But when more than half the wealth in the US is owned by  the top 1%, they simply can't spend it -- not even on egregious yachts and mansions. The Right Wing would like you to believe that this is how the "job creators" get the cash to start new businesses, create jobs and stimulate the economy. But when demand is slack, the urge to start new businesses -- or expand existing businesses -- is not very strong. So the wealthy simply let their $$ sit in banks or ultra-safe Treasuries, and that money does nothing to generate economic activity.

And now a pop quiz: Suppose you raise taxes on the top 1%, take some of that money to do something productive like build or repair our infrastructure. You buy building materials and hire construction workers and tradespeople of all kinds. This money gets recycled into the economy. Then what happens? (Hint: These are not new ideas. Read John Maynard Keynes. Learn about the "multiplier effect".)

Second pop quiz: The Right-Wing deficit scolds want us to use our $$ to "pay down the national debt". So who would get paid? Most of that debt is money we owe to ourselves. For example, a huge amount of US Treasury debt is held by the Social Security Trust Fund. So if we pay it off, who gets the money? More of that debt is owed to large US banks and corporations. So what will they do with the $$ if we pay down that debt? (Hint: They can't do much useful with the $$ they already have!) And then a third portion of the debt is owed to nations like China. Will we do ourselves any good by shipping them more of our cash, instead of our bonds?

This is not hard stuff. But we Americans pay an exceptionally high price for our ignorance of basic macroeconomics. We let politicians drown us in bullshit, and our news media are far too ignorant to help us understand what's going on.