Why We Can't Have Nice Things

New Jersey unemployment line: Equal opportunity suffering
while businesses sit on money.

I believe Atrios, a favorite political-economic blogger of mine, coined the phrase -- often used in his blog posts at Eschaton -- Why We Can't Have Nice Things. His meaning, essentially, is that certain economic policies keep the shrinking middle class and working class from sharing in the fruits of the American economy. Those certain economic policies are austerian, conservative, Republican, freshwater, whatever you want to call it.

In certain ways, we've recovered from the financial crisis of 2008 that brought on the Great Recession, but what's kept the recovery from being broad-based is the refusal of the political right to allow aggregate demand to rise through government stimulus. While businesses have seen their balance sheets filled to the brim as they sit on cash -- due to severe trimming of workforces, thus producing profit that isn't shared by workers -- that same workforce can't increase aggregate demand because businesses won't hire them due to low aggregate demand, and government can't grow that demand through stimulus spending on things like aging infrastructure, education, and research-and-development because of political resistance. Hence the no-nice-things predicament.

Now, conservative politicians and their think tanks and economist shills in the freshwater schools like the University of Chicago love to cite the theory of "crowding out," in which public investment (government spending) crowds out private investment (companies investing in capital goods to increase supply). The conservatives love this theory because is justifies being against both stimulus spending and redistribution -- such as government spending on unemployment insurance extensions and other safety-net programs that kick into higher gear automatically during downturns -- saying that it can't possibly help because anything the government does will either raise taxes or raise the deficit, thus driving up interest rates and reducing private investment.

A weird basis for this is the belief held by real-business-cycle economists (yes, freshwater folks) that all actors are rational and tuned in: If I, say an auto mechanic, hear a tax increase might be coming, I immediately stop spending and start saving to pay for the impending tax increase. (Have you ever done that? I didn't think so.) So even talking about raising taxes or increasing the deficit will shock the markets, the economy, the world, and conceivably cancel, retroactively, the Big Bang. I mean, why exist at all if taxes or deficits are going up?

On the other hand, is that the real world you live in? I certainly don't. For shits and giggles, recall the horrible effect the Clinton 1993 tax increase had on the U.S. economy, you know, the one that led to the greatest period of growth since WWII. I guess we weren't rational enough.

Another aspect of rational expectations is that, if I think something is going to happen, say a stock boom, I'll get into the market and partially cause the boom to happen. So actors acting rationally will alter what happens based on their rational expectations. RBC economists believe this in spite of the fact that it's how stock bubbles, dot-com bubbles, and real estate bubbles happen, you know, through the herd effect, which is what happens when a large bunch of people turn out to think they have rational expectations but instead go crazy until they panic and bring down the whole shebang. But then that never happens because RBC types don't believe in bubbles. They believe in efficient markets. You know, the ones that keep going kablooey. But no bubbles! Here's freshwater economics at its best, Eugene Fama of, yes, U of Chicago:

New Yorker Magazine: Many people would argue that, in this case, the inefficiency was primarily in the credit markets, not the stock market—that there was a credit bubble that inflated and ultimately burst.

Eugene Fama: I don’t even know what that means. People who get credit have to get it from somewhere. Does a credit bubble mean that people save too much during that period? I don’t know what a credit bubble means. I don’t even know what a bubble means. These words have become popular. I don’t think they have any meaning.

Great. I feel better now. Another example: There can't have been a housing boom and people borrowing way over their heads to purchase and purchase homes until the valuations on their homes not only exceeded their expectations but caused an entire market to go haywire and crash with a fury, taking down all the rational players, Wall Street and banks included. No, that couldn't happen. Why? Because rational actors like Alan Greenspan, Ben Bernanke, Warren Buffet, Hank Paulson, and Timothy Geithner (Robert Shiller's comments on Geithner begin about 2:25) said it couldn't.

Harumph.

The problem is that the crowding out theory is bunk, especially in our current situation in which conservative policies have precluded stimulus spending and private businesses haven't increased investment because of low aggregate demand in spite of the fact that real interest rates are at or below zero, which means that this is the time for the government to spend like crazy because the money will practically be free.

Why? Let's start with the paradox of thrift. Since the financial bubble popped, firms and individuals have embarked on an ongoing deleveraging to reduce the high levels of debt and risk that caused the financial bubble. But since your spending is my income and vice versa, if we both save, both our incomes will decline. How do we increase demand and grow the economy if we sit on cash rather than go out and spend? We can't. Our thrift reduces our incomes and thus our savings, so the economy suffers and we can't get out of our hole. Another way of saying it is austerity literally sucks.

What to do? Keynes and the Keynesians (saltwater economists) say economic stimulus with its multipliers, and the classical school of economics (freshwater economists) says there's no such thing as lack of aggregate demand, there can only be lack of aggregate supply. Refer back to crowding out to understand why they maintain what they do, but saltwater economists want to help labor to increase demand to grow the economy, and freshwater economists want to help businesses to increase supply to grow the economy. Another way of saying that is liberal economists are on the side of labor, and conservative economists are on the side of capital. Unfortunately, depending on who wins, we have what Thomas Picketty described in his massive tome, Capital, which explains how income inequality grows.

Since crowding out is a charade, the only justification for taking the conservative economic stance is to prevent government spending, thus reducing taxes, especially on the rich, who then happily support the conservatives and their professional economic shills.

And we are frozen in time, with no way for the average American to have nice things. Now, if you want an economics lecture that clearly demonstrates that curtailing investment is counterproductive when interest rates are unbelievably low, which they have been for almost six years, watch this very informative Kahn Academy illustrated lecture, and I'll shut up.

If you want to see a series of lectures that explain how interest rates impact investment -- or should impact investment! -- go here. It's very illuminating. Then vote for politicians who will not squander the opportunity to spend on infrastructure and other things that will increase employment, drive up demand, and reduce the suffering among the masses, because interest rates are at zero and money is cheap! Spend now, the paradox of thrift is killing us.

We deserve nice things. The rich already have them. To fix this, give people -- not business -- free money. If people have money, they will spend it and business wins, too. See how easy that is?