Speaking Frankly

(Part I of a sporadic series on what economics is all about. I think this is what I would call economic philosophy, which sounds intimidating, but if we look at it in small chunks, I'm hoping it won't be.)

I want to start examining some economic concepts. When I listen to economic news on the radio, the reporters and commentators seem to take some things for granted that I would like to challenge.

President Obama's budget is criticized by Republicans and some Democrats because it would increase the size of the deficit. Republicans also complain that it would also increase the size of government. "Blue Dog" Democrats say that most of the president's program would be worthwhile, but we can't afford them.

Meanwhile, the conservative governments of France and Germany say that they don't want to add any more economic stimulus programs in their countries because such spending might touch off inflation.

But are deficits and inflation necessarily bad things? Economist Ellen Frank says they aren't.

Frank is the author is The Raw Deal: How Myths About the Deficit, Inflation, and Wealth Impoverish America. This book was published by Beacon Press in 2004, and is available through the Oklahoma County Metropolitan Library System. The call number is 330.973 F8283r.

Starting on page 192 of The Raw Deal, Frank has a useful summary of the economic convential wisdom that has taken hold over the past 30 years. She notes that this is called supply-side economics by the people who favor it, and market fundamentalism by the people who oppose it.

This belief system calls for government economic policy to work toward balanced budgets, low inflation, and very low taxes on accumulated wealth or high incomes. It also calls for very low expenditures on government programs that provide services to ordinary people--services like health care, pensions, child welfare, or education.

Market fundamentalists insist that the government shouldn't help out its citizens or take care of the economy. They say that rich people will make productive investments that create jobs and make a better life for everyone, If allowed to make and keep as much money as possible. Under this belief system, it's just not possible that the unregulated free market would fail to provide fair access to jobs and resources.

Writing in 2004, Frank had seen the collapse of the dot com bubble on Wall Street, but not the collapse of the housing bubble and the mess that followed from it. But she accurately identified many of the pitfalls of supply-side economics, and the core fallacy that holds it together. That fallacy is that what is good for the economic elite is good for the rest of us and for society as a whole. The myth is that everyone can be rich.

"Financial wealth"--abstract entries in checkbooks and computer data banks--gets confused with the real economy. The real economy, Frank points out at the beginning of the book, is made up of actual goods and services--things like automobiles, haircuts, knee-replacement surgeries. Money is just a tool that helps these things get moved around. As Frank says on page 8:

Simple arithmetic dictates that the average standard of living in a society cannot grow faster than that society's output. Therefore, no one person's share can grow by more than the average unless somebody, somewhere, gets stuck with a smaller slice of the economic pie. If the economy grows at, say, 4 percent per year, then there will be only 4 percent more stuff--cars, bread, haircuts, housing--to go around. Some people, through luck or clever financial trnasactions, might manage to increase their own incomes by more than 4 percent. but when a lucky few investment specialists of CEOs realize tremendous gains, it stands to reason that others somewhere down the line either suffer losses or receive less than a full share of the economy's growth.

Throughout her book, Frank analyzes how the principles of supply-side economics are designed to allow rentiers to monopolize the products of the real economy at the expense of the rest of us. Rentiers are those elite few "individuals and institutions with substantial accumulated wealth who live on the interest income generated by financial assets--banks, financial firms, and their wealthy clients."

We're told that inflation and deficit spending are bad, and they are, for rentiers. For the rest of us, it's different.

For instance:

Debts of the federal government differ entirely from personal debts; they do not need to be repaid, are not claims on the income of ordinary families, and will not plague future generations. While it is true, in a vague and general sense, that "we" owe this money, it is also true, as any introductory economics textbook will explain, that we owe it mostly to ourselves.

These days "we" seem to owe quite a bit to the Chinese as well, and I'm not sure how this affects the equation. My hunch is that economic conservatives tend to exaggerate whatever this effect might be. At any rate, conservatives tend to ignore deficits when they are brought about by tax cuts for the wealthy or by expenditures on wars (which, coincidentally, tend to enrich private contractors in which they hold an ownership interest.) These same conservatives complain about deficits when they are caused by government expenditures that create demand in the real economy and benefit ordinary people.

The situation with inflation is similar. A moderate amount of inflation actually benefits ordinary people:

Evidence abounds that countries willing to tolerate moderate inflation are able to sustain higher rates of job growth for longer periods of time. A study by economists at the World Bank found that inflation rates of up to 20 percent annually are correlated, throughout the world, with higher rates of economic growth.

Frank notes that the only significant effect of inflation alone (not falling income or standards of living that might occur with or without inflation). "(I)nflation erodes the value of money over time." That hurts the extremely wealthy who depend on their accumulated income rather than on money earned by working for a living.

We live in interesting times. On the one hand, the Obama administration has promised real change from the exploitation and greed that reached its peak during the eight years of the second Bush administration. We do see many programs that promise to rebuild the real economy and help ordinary people.

On the other hand, Obama seems to accept much of the economic orthodoxy that culminated in the current worldwide economic depression. We need to seriously rethink that orthodoxy, and The Raw Deal is a very good place to start.