Tuesday, April 26, 2011

Deficits Are About Aggregate Demand not Default

 In our last post, "S&P's Rating Folly", we dealt with the misperceptions of deficits in a fiat currency sovereign nation and that default is only possible as a political choice.

On Sunday an Associated Press article was published in local newspapers across the United States on how a United States default would be disastrous for the economy.  This was not a news article.  The economic assumptions behind its "facts" are, at best, debatable if not flat out wrong. The AP article is an opinion piece and its being run as a news article was incompetent, if not journalistically unethical.

The political debate in the United States has been turned away from the causes of the financial crisis and the financial reforms needed to prevent another financial crisis to self-defeating economic myths which are perpetuated by their continuous repetition despite refutation and destructive consequences.  The working men and women poor, and the Middle Class of America have been targeted as the Evil Ones rather than the managers of the financial sector who caused the financial crisis and have so vastly profited and grown in systemic danger from the financial bailout.  Pensions, public workers, and unions have been targeted to divide them from the rest of working America that do not have pensions (about 76%), do not have the advanced education of many public employees, and do not benefit from collective bargaining.

As the Australian economist Bill Mitchell has said, "The ultimate aim at the macroeoconomic level is not to collect 'more taxes' to balance a budget but to ensure that aggregate demand is regulated to avoid inflationary growth in nominal spending."  Aggregate demand drives whether a sovereign government should increase or decrease spending.  ".. if the economy is suffering a major aggregate demand shortfall then not replacing the increased tax revenue overall (in the name of fairness) with expansionary spending measures is a mistake."  It does not make any difference whether these calls for taxes with spending cuts or tax cuts with spending cuts come from conservatives or progressives, it adds up to the same destructive policy of austerity which will only aggravate continuing high unemployment and slow economic growth if not recession.  We do not need friends like these and we do not need political leaders who refuse to follow an educated path dedicated to the well being of the people consistent with a republican democracy.

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