Inherent Assumptions
July 19, 2010
– Comments (9)
I was reading an article today entitled Learn to Love Our Massive Deficit which made some inherent assumptions I'm not sure I'm entirely comfortable with. You know, the kind of assumption that is not actually stated, but must be true for the argument itself to be true. The kind of assumption that, if it were expressed outright, one might or might not agree with, but that gets 'buried' or lost in the shuffle.
Here's the paragraph that caught my eye:
But wait. There is a counter-argument made by another very smart group of people. They argue that balancing the budget right now would be exactly the wrong thing to do! Our fundamental global economic problem is a lack of demand. We're not spending enough to keep our manufacturing plants running, our shops busy, our restaurants full -- which is why unemployment is still lingering near 10 percent. Cutting government spending, which is a substitute for private consumption and investment right now, would make the situation worse. So would any tax increase, since it takes money out of consumers' pockets.
Let's take them one at a time.
Our fundamental global economic problem is a lack of demand.
This is one I've heard or read in the media time and time again. The inherent assumption? That our global economic problem isn't oversupply.
I'm not so sure that's an assumption I'm personally willing to make. All we know for sure is that the supply/demand equation has changed. That we know. Is it because demand fell? Maybe. Or maybe, due to a lot of factors, we created too much supply. You know, things like all too easy credit and the creation of mortgage backed securities that I've read had at least a little something to do with the housing downturn that seemed to kick off the party. Think we that we had artificially high demand for housing, which caused homebuilders to overbuild, created a supply glut, and then when the artificial stimulus evaporated, the house of cards collapsed? Maybe?
Is it that we don't have enough demand now? Or is it that we had too much demand then? So the argument is that when we encounter an over-inflated bubble economy and the bubble bursts, what we should do is try to reinflate the bubble and put everyone back to work because lack of demand is the problem?
There's another inherent assumption here I'm not much of a fan of too:
Cutting government spending, which is a substitute for private consumption and investment right now, would make the situation worse.
Whether cutting government spending would make things worse or not isn't where I'm going (though that is an assumption that I'm sure could be legitmately challenged -- even if one agrees with it, there's still room for valid argument). Government spending is a substitute for private consumption right now? That's the part I'm not so sure about. All that goverment spending comes from somewhere. I think I have a paycheck stub, or a store receipt, or a bunch of other documements floating around that show that I pay taxes and fund that govermnment spending. Even if the government spends borrowed money, I'll be taxed at a later date to repay the loan. Maybe I look at it too simply and a real economist (unlike the armchair variety I am, or like to think myself sometimes) will tell me how wrong I am, but, since the money the government spends ultimately comes from me, whatever the government spends, I can't. I guess it's a 'substitute' in that sense, but the inherent assumption here is that if the government didn't spend it and instead let me keep it, I wouldn't spend it at all.
Maybe that's true. Maybe I'd put it in the bank.
Oh, wait, that ususally means the bank would turn around and lend it to someone who would spend it.
Hrm... well, I guess all these banks shoring up their balance sheets and refusing to lend money is the flaw in that line of reasoning.... or is it?
Maybe I'm wrong, but, based on my personal experience I see banks lending money -- but only to more highly qualified borrowers than they used to. You know, the same kind of borrower that could borrow money in the old days before teaser rates, no doc loans, and mortgage backed securities. So... the 'evil' banks aren't lending enough of that money back out? Maybe, but just like our 'lack of demand' argument, maybe the problem isn't that they're not lending enough out now, but that they were lending out too much before.
Just... maybe.
Then again, the crux of this article was about how deficits, at least for now, are a good thing. Maybe they are. That's not my point. My bone to pick here is with inherent assumptions. The kind of assumptions that have plenty of room for debate, but that often get taken as a 'given' in so many arguments.
Of course I don't expect inherent assumptions to go away anytime soon. I think it's rather human to make them -- I'm certain I have. So maybe I shouldn't be overly critical. I do think, however, that the better job we do at turning inherent assumptions into explicit ones that can be verified, challenged, or examined, the better we'll do at forming economic policy that meets our objectives.
Regards,
Russell (a.k.a. TMFEldrehad)
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