Total nerd post. If you don’t like reading nerd, please ignore this and accept my apologies for spamming you.
I originally wrote this as a reply to a friend who had joined one of the “Cut the Debt Now!” groups that seem to be popping up left and right now.
I am Republican and a fiscal conservative, and think we desperately need to pay down the debt, but right now is a particularly bad time to fixate on it.
Consumers and businesses are spending less. Government *has* to spend more now (or, we have to start exporting like mad, which shows no signs of happening) to offset their falling spending in order to keep the entire economy from shrinking and getting into a negative feedback loop that would make things much, much worse. (And to all the anti-Keynesians, please read the whole message before getting surly).
I’ve been studying economic depressions like we’re in and the mathematics of black holes, and I’m convinced there’s some underlying mathematical similarity. Inside the event horizon of a black hole, our very definition of space-time breaks down and “flip-flops”: space becomes time-like and time becomes space-like.
Similarly, inside the “event horizon” of a depression (called a liquidity trap by economists), behaviours which are ordinarily good (like saving money or cutting the deficit) have bad economic outcomes (google “the Paradox of Thrift” or “Fallacy of Composition”), and vice-versa.
There’s also a mathematical similarity between the speed of light in black holes, and the nominal Fed interest rate in depressions. If your spaceship falls through the event horizon of a black hole, it would have to travel faster than light to escape, which is impossible.
Similarly, you need a nominal Fed interest rate of < 0% to escape a liquidity trap, which is also impossible. This is why monetary policy (lowering the Fed interest rate) has been ineffective at getting us out of this depression, so we have to resort to fiscal stimulus, (deficit spending), to kick ourselves back out. Otherwise, we are going to be trapped in the depression for a long, long time.
I know that I’m about to be clobbered by some of my uber-conservative friends who think Keynes is a four-letter word. I don’t believe Keynesian economics is generally true, but it does have a range of validity when you’re inside a economic black hole. There is no Grand Unified Theory of Economics any more than there is one of physics. In physics, you patch different laws together (Newton’s law, Einstein’s law) and use them where they happen to be valid, and ignore them where they aren’t. It just so happens that we are in a time and place where Keynes has something to tell us.
All that was an incredibly long-winded way of saying that right now is exactly the wrong time to be focusing on federal deficits. The correct time to fixate on that was 5 years ago, or 5 years from now. Right now, our country has to focus on getting out of the “event horizon” of this depression, and the only way we know how to do that is increased deficit spending. Showing fiscal restraint (which is ordinarily a wonderful thing) at this point in time will only kick us back into the depression and make things worse.
<puts on asbestos underwear>Thoughts? Criticisms? I’m more interested in being right than defending my view, so if you think I’m wrong, I’d love to hear it.