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Consumption + Investment + Government Spending + Net Exports = Gross Domestic Product

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  • Strongly Liberal Democrat
    Dallas, TX
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    Dean Baker has this up at the Huffpost today: "Cruel Arithmetic and President Obama's Big Speech" (link).

    Here's a sample of one of the alarming things he has to say:

    "Consumption is unlikely to increase much from its current level because it is already actually quite high relative to income. The saving rate is under four percent, well below its pre-bubble average of eight percent, which means that people are spending an unusually high share of their income right now contrary to what is often claimed in the media. They are spending less than they did at the peak of the stock or housing bubbles, but that is because they have lost trillions of dollars of bubble generated wealth. In other words, there is little reason to expect consumers to spend a still higher share of their income than they are now."

    And then the heresy:

    "If President Obama wants to boost the economy, he will need to get more government spending to put people back to work, which will mean larger deficits. Obviously Congress is not likely to go along, but the Republican Congress is not likely to go along with anything he puts forward at this point.

    President Obama knows economics and basic arithmetic. He is a second-term president. If he is not in a position to tell the truth -- that we need larger deficits to boost the economy -- then no one is. It is long past the time where he should have been using the platform of the presidency to explain basic economics to the American people. The cost of not doing so has already been enormous. It will grow even larger the longer he waits."

    Dean Baker understands how the monetary system actually works, unlike elected officials in both parties.
  • Are you sure you want to delete this post?
    Baker appears sufficiently smart to understand a basic accounting identity, but his comment on politics neglects that humans are social.

    Obama might understand basic economics, but politics is also a game of power and a system where relationships matter a lot. Politicians likely understand that their position depends on a brief impression and on the defense of the interests which will ensure their re-election. A spot in the news isn't a place to debate or negotiate; it's a place to make an impression. Obama won't come on TV or use his public addresses to sell his projects through a cunning and well-structured argumentation; he'd rather stick to simple ideas and plain claims.

    As for elected officials in general, do they seriously talk between them the way they talk to the public? If their seats depend on tax cuts for their business campaign contributors, they'll use whatever they can to make it seem like tax cuts is a priority -- and it would even be better if the whole nation believed that it was in the interests of the majority. Why do you think that the right ceases on deficits, the debt or problems in governmental programs? Because they did a careful analysis of the situation? I highly doubt that part. Instead, I'd rather see a scenario where they favor a different use of resources -- i.e., tax cuts instead of spending increases. Debt problems, even if they are long run problems, are good excuses to fight social programs. The narrative matters only so far as it matters to the public, but in truth any excuse could be good.

    Likewise, when Obama supports things like gay marriage or his health care reform, he's also appealing to the Democratic voting base. For good or for worst, they want these policies to be implemented and as a good team player he's going to give them things to be happy about. Come the next election, these voters have a greater chance to stick to the Blue team if it gave them most of what they wanted.

    Of course, both parties could be seriously convinced of their position. After all, people of a same group tend to share certain opinions and certain values. It wouldn't surprising that both sides present a favorable gut feel toward specific policy types. Going down that road, you'd expect a very similar situation to arise, though for different reasons. There are certain opinions that Republicans will not dare to produce within their caucus, expecting to be negatively sanctioned (e.g., being excluded, seeing the party vote against their favored policies, etc.). It's one reason why you rarely see people breaking ranks: they internalize a certain vision of what are "reasonable arguments" in their entourage and they won't move too far from it. Same for Democrats, by the way. As it happens, Obama might not be saying certain things (such as what Baker would like him to say) because he fears he'd receive negative responses from too many voters or too many members of his party. Likewise, he might not use his status as President to sell every idea he personally believes in because it's not seen as acceptable.

    To know exactly how and why this applies, we'd of course need a careful study and lots of data, but the bottom line is that it's not hard to imagine that Baker's comment rests on a very optimistic vision of humans where rational arguments and criticism wins both votes and discussions.
  • Strongly Liberal Democrat
    Dallas, TX
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    Okay, these are some great comments.

    A lot of this is infinite regression. Meaning the political class put the "balance the budget" ideas out there and then they poll tested them. So yeah, very dark forces at work, which seems to be the case with all religions.

    It still just a matter of beating the deficit terrorists at their own game. The problem is that both parties have ended up investing so much political capital in blaming each other for an imaginary problem. And then Clinton ran a surplus on the backs of an unsustainable credit expansion, helping to confuse the issue further.

    Here's what Republicans have told their own people about the deficit when they've been in power. Contrast this with Obama's repeated insistence that "We're Broke" and constant attempts to get Democrats to swallow safety net cuts.

    Director of the Reagan White House Council of Economic Advisers, William Niskanen, April 9, 1981, as reported in AP:
    The simple relationship between deficits and inflation is as close to being empty as can be perceived.

    There are no necessary relationships between the deficit and money growth.

    Evidence doesn’t support” the assertion that deficits crowd out private borrowers.

    Ronald Reagan: "I don't worry about the deficit. It's big enough to take care of itself."

    George W. Bush: "I don't worry about numbers on pieces of paper, I worry about jobs!"

    Dick Cheney: "Reagan taught us that deficits don't matter." (MMT'ers would add per se)