McCain: Let’s Destroy the Economy for the Sake of an Anology
Watch in amazement as John McCain promises to make the government “live on a budget, just like you do”:
The first thing to say about this is that it would be silly for the government to behave “just like you do” when the government doesn’t otherwise resemble you in any respect. Sound budgeting practices for a 27 year-old blogger are very different from sound budgeting practices for a 72 year-old multimillionaire Senator. That’s common sense. But suppose we were comparing me not to a 72 year-old multimillionaire Senator, but to a 232 year-old immortal abstract concept that’s able to print money and legally coerce people into giving it money? Well, that would be a very different situation, indeed. Or so you might think.
Another way of thinking about what’s wrong with this idea is that how much money it’s prudent to borrow has something to do with the terms on which you can borrow it. Credit card debt comes at an extremely high interest rate, so the prudent person should avoid amassing any unless there’s absolutely no alternative. But at the moment the federal government can borrow money on very favorable terms, so it’s worth doing so if there’s anything useful on which to spend the money.
But last, connect the “spending freeze” part of this to the “just like you” part. “You” need to cut back on spending because of the bad times. That means other people will get their hands on less of your money. And then McCain wants the government to also cut back on spending. Meanwhile, state and local government has to cut back on spending. But if consumers cut spending at the same time businesses are reducing investment and state and local government are cutting spending and then the federal government also reduces spending well, then, everyone is going to be spending less and less. Which means everyone is going to be earning less and less. And things are just going to get worse and worse. Oftentimes it’s possible to break this cycle without large-scale deficit spending because the Fed can lower interest rates, which makes it easier to borrow and spurs new investments. But the nature of the current crisis is that this won’t work. If the federal government cuts back on spending then we’re going to go down the drain.
36 Responses to “McCain: Let’s Destroy the Economy for the Sake of an Anology”
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October 17th, 2008 at 2:46 pm
That would be “analogy”, Matt. Spellcheck your headlines.
October 17th, 2008 at 2:53 pm
Actually, anoles are cute little lizards:
http://images.google.com/images?hl=en&q=anole&btnG=Search+Images&gbv=2
Anology, therefore, must be the study of anoles. It is a worthwhile pursuit but probably not worth destroying the economy over.
October 17th, 2008 at 2:56 pm
But at the moment the federal government can borrow money on very favorable terms, so it’s worth doing so if there’s anything useful on which to spend the money.
This is true in all times, by the way, which is the kernel of truth in Cheney’s famous line: “deficits don’t matter.”
October 17th, 2008 at 3:00 pm
Rich people don’t go down the drain. Under McCain’s prescription, he and his rich wife and their rich friends will have the luxury to sit atop their piles of cash, then scoop up all our depreciated assets at fire sale prices. His plan is great for the country club set.
October 17th, 2008 at 3:04 pm
The part I like most about all of this is how McCain insists on saying that Obama is the one who is proposing to govern like Hoover.
(I wonder how much bitter laughter ensues when McCain campaign strategists are forced to focus-group McCain’s Hoover line of attack. I’m sure it’s playing very well among low-information voters in swing states.)
October 17th, 2008 at 3:41 pm
Is it possible for the government to refinance some or all of its existing debt at the current prevailing interest rate?
October 17th, 2008 at 3:50 pm
MY:”But at the moment the federal government can borrow money on very favorable terms”
It is a certainty that these favorable terms will not last forever. It is in fact desirable that they don’t last very long at all.
via Calculated Risk:The yield on 3 month treasuries: 0.79% up from up from 0.40% today.
3:”This is true in all times, by the way”
I remember Fed Chairman Volcker very very well.
October 17th, 2008 at 3:51 pm
6:No.
October 17th, 2008 at 3:54 pm
McCain said: “I’m gonna make the government live on a budget just like you do.”
To be fair, I don’t think McCain is suggesting that the budgets are the parallel, as Matt interprets, but rather “the need” to budget.
It’s still a dumb analogy. That aside, I agree with Matt’s larger point.
October 17th, 2008 at 3:54 pm
8: And why not?
October 17th, 2008 at 4:05 pm
This can be a challenging point to present to the general public, since the instinct of many people is to live more frugally and responsibly during hard times. Once upon a time, Americans intuitively recognized the need for Keynesian stimulus during a recession – even if they didn’t all call it “Keynesian stimulus.” Now after a few decades of Friedman, Reagan, Gingrich and Bush, and Clintonian budget-balancing politics, they have been trained to think differently and to associate all deficits with wasteful profligacy, rather than public investment, and with an onerous long-term national debt. We need a good one-liner or a short paragraph for Obama to use to fight back against the McCain plan, and to explain this point in an easily graspable way to the general public. Maybe something like:
“Senator McCain wants everyone in America to tighten their belts except for the fat cats on Wall Street. For them, he wants to buy a whole new wider belt with three extra holes.”
or
“We do need to cut out wasteful spending; but now is not the time to cut back on productive investment in America’s future. We need investment now more than ever: Investing now will save and create jobs, and stimulate more private sector investment to follow. And it’s the best way to make sure those big bailout bucks we just gave Wall Street flow back out onto Main Street where they are most needed.”
“John McCain’s new plan looks a lot like the old Republican scam. He wants to cut desperately needed investments in schools, energy renewal and health care reform, give the money back to the rich, and hope it all trickles down to everyone else somehow. Senator McCain told some pretty good jokes at the Al Smith dinner on Thursday, but this is the best one yet! And we’ve heard it before. My plan is to put the money where it is most needed, and build prosperity from the bottom up, not the top down.”
What we really need are for all the professional economists to get out there and hit the airwaves and the opinion pages to spread the message.
October 17th, 2008 at 4:06 pm
Michael comments at Brad Setser’s blog.
Setser says it is a “nightmare scenario” that he doesn’t think is likely.
I don’t know how it will play out, but I do think we will find out sooner than we would like.
October 17th, 2008 at 4:06 pm
So I take it you’re meaning to deny the causal inefficacy criterion for something’s being abstract?
October 17th, 2008 at 4:11 pm
10:Umm, cause we don’t own it, and them that do own longer term treasuries ain’t gonna volunteer to trade them down for lower-paying stuff?
The Bush II administration, IIRC, did “default” on some 30-yr bonds from the late 70s that were supposed to pay 18% on redemption. Paid 9%, I think.
October 17th, 2008 at 4:22 pm
14: If the Treasury can’t use extra cash on hand to discharge old debts, what does it mean to “pay down the debt”? Why can’t Treasury borrow money at 0% to buy back old bonds that pay 18%? (I’m genuinely curious. I have no idea what I’m talking about.)
October 17th, 2008 at 4:47 pm
Why can’t states run deficits (other than their laws, which can be changed)? They can also legally coerce people into giving them money. They can’t borrow on terms as favorable as the federal government, but still on terms better than people.
October 17th, 2008 at 5:06 pm
I second 16. I just Googled on this a bit and found many bloggers claiming states “aren’t allowed to run deficits” but no backing evidence? Is this in the U.S. Constitution? Or is it just that many states have balanced budget amendments? It seems like we’re constantly voting on bond issues here in New York. Is a bond referendum not technically a budget liability?
October 17th, 2008 at 5:47 pm
Chris Conway is right, many states have balanced budget amendments, but they also seperate capital and operational expenses, they are allowe dto go into debt. Just like households, for me a balanced budget means I have enough to pay my mortgage, not that I’m debt free.
October 17th, 2008 at 6:38 pm
Eric K:
It’s easy. States can’t float bonds the way the US Government can. Most states would be forced to enter bankruptcy if they spent like the federal government. If taxes became to high(in say NJ), you could move to Pennsylvania or New York. It would get to the point that the tax burden would get too much for the remaining residents. While it is easy to leave NJ and still get a job, it is not as easy to leave the USA.
October 17th, 2008 at 6:58 pm
McCain is right: he doesn’t know jack-sh*t about the economy of the United States!
October 17th, 2008 at 7:26 pm
Fuck, let’s see McCain live on a budget like a normal American before we let him anywhere near the steering wheel for the entire freakin’ economy.
Anyone who’s spending nearly three hundred grand a year on household fucking help could stand some lessons on where to cut the fat before he goes around turning off everyone *else’s* utilities and social services.
October 17th, 2008 at 8:46 pm
This was actually a somewhat convincing post by Matt. However, I think I just recently heard Obama talk about “pay-go”
Doesn’t that mean not spending more than you have?
October 17th, 2008 at 8:49 pm
You need to speak like uneducated dupe. When American families are up against tough times they don’t cut spending across the board. They try to cut back on things they don’t need like going out to dinner or seeing a movie or buying a new TV. The scalpel Matt the scalpel.
October 17th, 2008 at 8:52 pm
This can be a challenging point to present to the general public, since the instinct of many people is to live more frugally and responsibly during hard times. Once upon a time, Americans intuitively recognized the need for Keynesian stimulus during a recession – even if they didn’t all call it “Keynesian stimulus.”
I would put it this wau: Once upon a time, Americans were duped into believing that the government could create resources out of thin air and intuitively responded to recession with the idea that government should end the recession by magically creating the resources.
Listen folks, it’s not that difficult to understand. Investments can only be made with savings. You cannot borrow from the future. You can only borrow from what someone else has saved. The only way that the government can get this money to spend on “investment” is for someone else to save it. If we try as hard as we can to end the recession by getting people not to save and to spend, spend, spend, we will either have to dupe some other country into saving and lending us the money, or else eventually we will have no more actual resources (which will happen anyway if the other governments decide that we are trustworthy lenders, which will eventually happen). At that point, if the government tries to increase” spending and investment” by borrowing the money from itself (i.e. through the Federal Reserve), it will find that “though we had plenty of money, there was nothing that money could buy” as Rudyard Kipling said, and the only effect of massive borrowing will be hyperinflation.
November 19th, 2008 at 3:53 pm
I think McCain’s point was that the government should show more fiscal responsibility by controlling spending. And by the way people, this class envy I read on here is wearing thin. Demonize corporations and rich people all you like. I never got a job from a poor person. The point is, smaller government and lower taxes and personal responsibility are values that made this country the envy of the world, and if you encourage government dependence and tax everyone to death we will all lose in the end.
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