The deficit hawks' war on algebra.

[Imperialism Inc.]

The type of analysis below is exactly what I'm trying to work toward with my blog entries on basic macroeconomics. The deficit hawks are the same people who rail against letting the dollar fall in value. There are two ways to cut the deficit without recession. Get investment to increase which is currently blocked by the interest rate being at zero and not being able to go any lower. Or, increase exports (reduce our trade deficit). The only mechanism for that to happen is to let the dollar fall. If the dollar falls our goods become cheaper to others and their more expensive to us. Saying you are going to get us out of our mess by blocking these two avenues and reducing deficits at the same time is equivalent to arguing that 2+2 doesn't equal 4.

ECON 101 FAIL

OK, folks. It's time for a refresher on basic national accounts. Treasury Secretary Tim Geithner is interested in reducing current account surpluses around the world without devaluing the dollar. Good luck with that.

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As a matter of pure accounting, there are exactly the two ways to avoid large government deficit. One is for private investment to rise. Unfortunately, unemployment is at 9.6 percent and capacity utilization is low. Businesses have no incentive to invest in more capital when they have existing capital already going to waste. The only other way to avoid increasing government deficits is to increase net exports. Econ 101 says the dollar must fall relative to other currencies in the world.

So when unemployment is high, capacity utilization is low, and devaluation is unprincipled, what is left to do to increase national savings? Declare war on algebra?

As for Geithner, he has a little more wiggle room, reportedly declaring that the fiscal consolidation will wait until the recovery strengthens.