Thursday, November 10, 2011

Austerity vs. Stimulus: a False Choice?

Above is a CNBC Squawkbox video from 11/07. Note 8 minutes to 9:50. Below is an excerpt of the text which is of interest:

Question/statement by Liesman of CNBC: If you look at the jobs numbers, there certainly should be higher or would be -- there would be more robust numbers that could engender more confidence if the state and local governments weren't laying off.

Answer by John Ryding of RDO Economics: Steve, let me make this point. I always believe that the distinction between austerity and stimulus is a false choice. It's about sustainability of government programs and the problem is we have a large fiscal deficit at the time of two unsustainable government programs, Medicare and Social Security are kicking in. Now we have to reform those programs ultimately. So they remain viable for the long term. But the U.S. has as many problems with political groups blocking reform....

What Ryding is stating is that X amount of public sector workers, that is completely unsustainable, replaced by a new level of X-1 public sector workers, is not “austerity”. Rather it’s a basic business budget proposition. That remaining at level X as a stimulus approach is a false choice.

An item worth considering is how did one arrive at X amount of public sector workers? X was achieved with state government experiencing increasing tax revenue 2002-2007 (which most states did experience) and additional debt (which many states exercised). Underlying these two phenomena leading to level X amount of public sector workers was politicos that had the same exact mindset as residential homeowners, that is, what goes up continues to go up. Stated alternatively, the rise in tax revenue was considered a constant unending revenue stream leading to level X based upon endlessly rising revenue. In turn additional hiring caused by additional debt which was also based/financed upon the misplaced concept of endlessly rising revenue.

Hence X is/was a false number aka a bubble number. X-1 is the true number. Therefore, reducing to X-1 is not “austerity” its merely returning from a bubble number.

That being said, the counter argument [Keynesian counter argument] is that laying off the public sector workers (movement from X to X-1) reduces demand and hence is counter productive. That “stimulus” needs added to stop the movement from X to X-1 which then stabilizes or enhances demand.

One of the many problems with the Keynesian argument is that “stimulus” proposed to keep X from declining is in essence a continuation of a false bubble number. That in fact the argument regarding "stimulus" is to sustain a component of a larger previous bubble.

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