Thursday, August 1, 2013

Investment Begets Growth.

It really shouldn't be complicated. Investment begets growth. That's just basic economics.

Unfortunately, the "TEA" tinged politics of austerity cloud the basic economics of growth. That's been a major obstacle to any kind of legislation that could foster more economic growth. But today, we're finally hearing some critical voices chime in to request an end to austerity.

The latest sign that the deficit fever may have broken: a new CNBC survey of prominent money managers, investment strategists, and corporate economists finds that “Wall Street is suddenly yawning over the deficit.” For the first time since the survey began during the recession, they found that a majority of respondents say that reducing the deficit isn’t urgent. In January, 80 percent of those surveyed said the U.S. should urgently deal with the budget issue, while just 16 percent said the country has “at least a couple of years” to act. Now, the urgent camp has dropped to 40 percent and the “couple of years” crew has risen to 52 percent. Another 8 percent said we don’t need a deficit plan at all. [...]

“Our deficits are falling at the fastest rate in 60 years,” President Obama told the crowd at Knox College in Illinois last week. He’s right, Politifact said, with some important caveats.

But that doesn’t mean we should be fully celebrating. Much of the decline comes from austerity programs like sequestration, which most economists and Americans believe is also hurting economic growth (even though today’s GDP numbers beat expectations) and is unquestionably damaging government service delivery. The core argument of deficit hawks is that cutting red ink will boost job creation and economic output, even though many economists say that doesn’t really make economic sense in the current environment.

And that’s how the current downtick in the deficit could deal a one-two punch to the austerity agenda. First, in the short term, it sucks the wind out of the sails of those pushing for cuts as it makes them less urgent. And second, in the long term, if sequestration and other austerity measures prove damaging to growth, it’ll undermine the intellectual foundation of the agenda as empirically wrong — in case Europe hasn’t already done that.

Oh, yes. That's right. We're seeing plenty of deficit reduction. In fact, The White House recently forecast a $200 billion smaller budget deficit for Fiscal Year 2013 alone! And that's on top of the May Congressional Budget Office report that knocked $600 billion from its deficit projection for the next decade.

So the federal budget really isn't the problem... Except for the matter that all these recent budget cuts have slowed economic recovery. In fact, it's a miracle our economy is growing at all. (Actually, it's past stimulative measures, like the Recovery Act, that have helped the economy turn around and grow at all.)

Yesterday, Desert Beacon went into more detail. Here's the key takeaway.

As has been argued repeatedly in this space, you don’t get economic growth as measured in improvements in the Gross Domestic Product if you reduce one of the components of the GDP formula: Government spending.  One of the reasons GOP economic arguments make no sense is simply that you can’t have it both ways — the reduction of government spending reduces in turn the total GDP, therefore contending that government spending is a drag on the overall economy is nonsense.

Again, investment begets growth. It's really not that complicated. Well, at least the economics aren't.

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