Monday, 26 October 2009

Obama and David Cameron are clueless.

Obama wrestling with jobs outlook” is a headline in the Wall Street Journal, 23rd October 2009. The article below starts, “....the Obama administration is searching for ways to boost job growth without adding to the federal budget deficit.”

God give me strength. How’s he going to do that? It would be easier to make pigs fly.

And David Cameron, leader of the Tory Party and the UK’s chief economic illiterate, claims that the value added tax cut earlier this year was a bad idea because it added to the deficit! Well running a deficit in a recession is the right thing to do. Cameron has learned nothing from Keynes or the 1930s.

This is very elementary, but a “job” is an activity that involves person X producing something because person Y is prepared to pay for the “something”. If all the “Y” people are saving, rather than spending (which they are at the moment) that means no jobs (or at least a shortage of jobs). Solution: print money and give it to “Y” people – well, every household to be more realistic.
Yes, I know there is an inflationary danger. But the world economy has been blown off course.

When you’ve been blown off course you have to make a correction. You may undercorrect or overcorrect. It would have been far better not to have had to make any correction, but we are where we are. We have to attempt a correction. Doing nothing, or doing far too little is fatuous.

One problem is that the deficit so far, roughly $1.4trillion for the year ended 30th Sept 09 in the US, pales into significance compared to the loss of worth in household balance sheets over the last two years, roughly $10trillion. In short, if another $1trillion was printed and handed to US households, they would still be feeling poor compared to two years ago. But this trillion might improve their cash positions enough to induce the required reduction saving and increased spending. (That’s saving of money, as distinct from saving physical goods or similar assets – two very different things).

On the other hand Janet Tavakoli spells out some good reasons for thinking a further two or three trillion are needed (number of households under water, etc) Bizarrely she claims this cannot be done because the US got cannot borrow this much more. Janet: it doesn’t have to: it can just print the stuff!!!!! Yes, that could be inflationary: every six year old knows that. And its very difficult to know how much to print. But the point is that “borrowing” is not a constraint.

And finally, if there is one thing a government ought to be able to do in a recession it is to maintain employment in areas where it has direct control, e.g. in central and local government. But the US government (doubtless like many other governments) hasn’t even managed that!

As I said: God give me strength. Now I’m off to tear my hair out.

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