Monday, February 21, 2011

Government Shut Down for What?

So it seems that Boehner is going to pull a Gingrich.  Both the president and the House Republicans’ plans cuts are relatively minor.  But the question is why cut spending now.  The only reason spending cuts are necessary, if you agree that the crisis was caused by collapsing demand (not a supply shock) is because there is too much demand recovery.  That would be signaled by full capacity, rising interest rates, and/or rising prices.

In the first case, industrial capacity utilization was in January 2011 at around 76%, below the average for the 1972-2010 of close to 80%.  In the case of interest rates, both short term and long-term rates are incredibly low.  So if the economy is not at full capacity price pressures are not driven by demand.

The US government can, contrary to you, borrow at low rates.  The question is not so much if it should do it, but for what purpose.  I would suggest that they give me more money, but I’m sure most people will be bitterly opposed!

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