Falling Down The Economic Elevator Shaft

by: Steven Hansen

Economists continue to warn that austerity is not the way to go for government spending. I am open to using austerity as one of the tools to balance an economy - just not the primary tool. You cannot hope to pay off sovereign debt by contracting the economy.

What would an economy look like if we taxed and pared spending to the bone? Lord Keynes answered "We would have a depression."

There is enough evidence to take Lord Keynes' answer as a given - even though scientifically this "theorem" is based on a limited amount of iterations with situations that did not include a sovereign debt load of 100% of GDP. The USA economy could be in the zone of the no win scenario with all paths leading to an elevator shaft with no elevator present - as there is also enough evidence to conclude the debt load itself works against the economy outgrowing the debt.

It is obvious that reducing spending anywhere in an economy provides a headwind to economic growth. The above graph showing percent change of spending (from previous period) from BEA.gov shows the infamous recession period of 1937 where a recession occurred within a depression. Please note that officially this recession is dated from May 1937 to June 1938. Also note the brown line on the above graph showing consumer spending.

As a consumer of empirical evidence, one could argue that the recession of 1937 was already baked into the economy - and a moderate contraction of government spending was icing on the cake. In any event, it is difficult to argue that contraction of government spending was a positive influence on the economy.

Debt itself likely is now the governing factor due to the way the economy is currently structured. However, under no scenario being discussed by the politicos will the USA be reducing the debt; it will just continue to grow and grow. The graph below from the Congressional Budget Office (CBO) shows the gap between government revenues and government spending.

I find most of the economic dialogue appearing in the press about the debt and austerity disingenuous. The USA is faced with several paths, and all paths when extrapolated lead to failure. Captain Kirk changed the rules when faced with the no win scenario. The solution to the current situation in the USA is changing the rules of mainstream monetary and fiscal policy.

Pundits talk about the economy believing it works like an accounting balance sheet. If you want to believe this, the economy sooner or later will be falling down one of the elevator shafts. The USA cannot contract its way out of this debt crisis.

My weekly economic review is in my instablog - is the economy really grabbing hold?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.