Wednesday, 8 June 2011

Verbal garbage from Bernanke.

Here is a paragraph from a speech by Bernanke (in italics). If you dose off half way thru (and I wouldn’t blame you), you could skip to my less than flattering comments below.

Of course the head of a central bank holds a politically sensitive position, thus when reading their material it is necessary to read between the lines. Possibly Bernanke is just saying (in convoluted language) “we’ve got to do something about the deficit". At the same time, possibly he actually means what he says here:

The prospect of increasing fiscal drag on the recovery highlights one of the many difficult trade-offs faced by fiscal policymakers: If the nation is to have a healthy economic future, policymakers urgently need to put the federal government's finances on a sustainable trajectory. But, on the other hand, a sharp fiscal consolidation focused on the very near term could be self-defeating if it were to undercut the still-fragile recovery. The solution to this dilemma, I believe, lies in recognizing that our nation's fiscal problems are inherently long-term in nature. Consequently, the appropriate response is to move quickly to enact a credible, long-term plan for fiscal consolidation. By taking decisions today that lead to fiscal consolidation over a longer horizon, policymakers can avoid a sudden fiscal contraction that could put the recovery at risk. At the same time, establishing a credible plan for reducing future deficits now would not only enhance economic performance in the long run, but could also yield near-term benefits by leading to lower long-term interest rates and increased consumer and business confidence.

First, as regards “fiscal drag”, the latter is simply the tendency as GDP rises in money terms (as distinct from real terms) for more people to pay more income tax. This “fiscal drag” phenomenon goes on ALL THE TIME!!!! It happens regardless of whether there is a recession or no recession. It happens whether there is a deficit or a surplus. So why on earth does Bernanke mention it? Presumably just to pad out his speech with important sounding phrases like “fiscal drag”. (Incidentally, beware of the Wiki definition of fiscal drag. It’s wrong. It’s nice to see this definition contains an MMT phrase, “net savings desires”, but it’s much more important to get definitions right.)

Next, Bernanke tells us that a “sharp fiscal consolidation” would reduce demand, which is allegedly a “dilemma”. (By the way, the phrase “fiscal consolidation” sounds important, doesn’t it?)

Anyway, he has the solution for this “dilemma”. (Thank God for that). He says “The solution to this dilemma, I believe, lies in recognizing that our nation's fiscal problems are inherently long-term in nature.” Complete bunk!

At least half the deficit derives simply from the fact that a bunch a school children in Congress are squabbling about taxes, public spending, and related matters. And no one will agree to a decent tax increase unless they get their favourite toy. (That’s the so called structural deficit.)

This “dilemma” could be resolved in 24 hours if members of Congress just grow up and recognise that public spending ought to be funded by tax. The increased taxation that would resolve this “dilemma” would NOT, repeat NOT result in any standard of living hit for US citizens, despite the fact that large numbers of economic illiterates in high places think that some sort of pain or austerity WOULD flow from such tax increases. Reason is as follows.

If government (aka school children) decides to collect $X less in tax than is needed to cover public spending, then on the face of it, government has to borrow $X. (Actually that’s not strictly correct: what government needs to do is borrow an amount such that the demand reducing effect of the borrowing equals the demand increasing effect of $X worth of spending. But I won’t bother with strict accuracy on this point.)

Thus if government increases tax tomorrow by enough to cover all government spending, there’d be NO EFFECT on living standards, GDP, total numbers employed, etc etc. In short, there is no “austerity” or “pain”.

Conclusion so far: in as far as the deficit derives from the above childish behaviour, the “fiscal problems” are not, as Bernanke claims, “inherently long-term in nature.” Rather, the problem is political, and given an outbreak of common sense, could be solved in 24 hours. How long the problem persists is a POLITICAL JUDGEMENT. It could be short term or it could be very long term. But the problem is not “inherently long-term”.

As distinct from the extent to which the deficit derives from childishness, the deficit partially derives from stimulus. Here again, the so called problem is not inherently long-term nor does it make sense to “quickly to enact a credible, long-term plan for fiscal consolidation.” That is because the stimulus part of the deficit is a REACTION to the recession and the latters’ severity and duration (or it should be). I.e. the remedy needs to last as long as the disease lasts.


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