Wednesday, August 3, 2011

Debt and Deflation

I am, like many, pretty disappointed in the direction the federal government is taking by charging headlong into austerity in the midst of a very serious economic crisis. Yes, I still call it a crisis, what else would you call it when our economy has almost 10% unemployment for such an extended period?  There is a time for austerity for sure, but that is when the economy is on solid footing, not when it is struggling to gain any traction at all.

If you need any proof, look no farther than the latest report from the BLS on personal income which shows that deflation has returned and wages and salaries are falling. Here is Catherine Rampell of the New York Times on the report:

For the first time in a year, consumer prices fell in June, according to a new report from the Commerce Department released Tuesday. The price decline was driven by energy declines, and is just one month’s data point, but even so, the figure is worrisome. The Federal Reserve pays close attention to this price index (more so, reportedly, than to the Consumer Price Index released by the Labor Department); and you may recall that part of the reason the Federal Reserve engaged in quantitative easing was the threat of a deflationary spiral.

The Commerce Department’s report delivered other bad news, too.

Nominal personal income increased by just 0.1 percent in June — and the increase was due to higher government transfer payments (like unemployment benefits) and capital gains income, not wages and salaries.

In fact, private wage and salary income fell in June.

None of these facts bode well for growth in the third quarter of this year, given that the economy is so dependent on consumer spending. And the austerity measures created by the recent debt ceiling deal look unlikely to make things better.

It is hard to see how moving prematurely to austerity does anything but add a couple of years onto the economic malaise we now find ourselves in.

And to me the entire narrative is discordant: the US did not become the economic superpower because of small government alone, it was also because of things like public higher education, government sponsored research, infrastructure and so on.  So let's talk about investment, not just cuts.

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