The International Monetary Fund (IMF) has just put out a paper on austerity. It argues that in the medium term, austerity is self-defeating. This is because austerity causes the economy to shrink by a greater percentage than the debt shrinks.

When deficit scolds talk about the national debt, they almost always do it in raw numbers. This is because “$14 trillion” sounds a lot more scary than “Our debt is equal to about our yearly productivity.” But the proper way to look at government debt is relative to GDP or even more so Potential GDP. Traditionally, the way to get debt paid off is to outgrow it. This is how we got rid of most of our debt from World War II. (At least we did until that great debt cutter Ronald Reagan got into office.)

Given this fact, when looking at debt, we have to look at two variables: the size of the debt and the size of the economy. Those who would have us cut and tax our way out of debt introduce the concept of “confidence.” This is the idea that businesses will see that the government is “serious” about debt, think the economy will soon by roaring, and so start investing in capital equipment and hiring people. This is a ridiculous idea that shows a shocking level of ignorance about how businesses actually work. As we have seen again and again, when the government cuts its spending, businesses correctly determine that the bad economic times will continue. This is exactly why business groups were against the Sequester.

There is, of course, a time when cutting government spending will help the economy: during a boom. When the economy is humming along, government debt can make it more expensive for businesses to borrow money. This is because the government has to borrow a fair amount of the available funds to service its debt. But that is most definitely not the case right now. In a depressed economy, there is too much money looking for too few opportunities to be used. Now is exactly the time for the government to be running large deficits.

Paul Krugman created a simple model of the effect of austerity on the government’s debt to GDP ratio. He calls the country Osbornia, after the austerity true believing Prime Minister of the UK. He assumes an economy very much like our own and shows that after 5 years of gradual austerity, the debt problem is worse than doing nothing for 6 years. Of course, the problem isn’t one round of austerity. The problem is that austerity is piled on top of itself. We’ve seen this in the 2011 deficit deal, then the Fiscal Cliff deal, and now the Sequester deal.

All of this shows what we already know: all of this austerity (which isn’t nearly so bad as what they are dealing with in Europe) is slowing our economic recovery. What we need is to put people to work and grow the economy. Even the conservatives claim to understand this. The problem is that they seem to think that the way to grow the economy is to destroy the government and allow the “magic” of the market to work. The problem is that everything we know about economics shows that this isn’t the case.

On Facebook someone said he needed $1000 for furniture. He asked what the odds were that he could win it on Lotto. Someone responded, “Go to the casino and put $500 on Roulette. Pick black, if you win, you doubled your money. If you lose, then bet $1000. Sooner or later black will come up…”

This is the Martingale better system. It works like this: bet $1. If you win, pocket the extra $1 and start over. If you lose, bet $2. Continue until you win. At the end of this sequence, you will always win $1. Always!

There is a catch, of course. You have to have a really big bank roll to back this up. If you’ve spent much time flipping coins, you know that getting heads six times in a row is not all that uncommon. To allow for this, you would have to have a $63 bank roll. And there is a still a 50% chance you would lose on the seventh flip (or roll or card deal or whatever). So you are risking enormous amounts of money for very little reward. And it is a very time consuming way to make money. If you had enough money to make it worth while, you would be far better off in the stock market.

Yesterday, Matt Yglesias wrote about this Facebook suggestion. But he did so in order to make the lamest comment I’ve ever seen. He noted that on a roulette wheel, there are two numbers (0 and 00) that are neither red nor black. Thus the odds of winning are less than 50%. Okay, but that makes no difference to the Martingale system! You could use the system by taking 21 red. It just means that you would have to have a much larger bank roll. But otherwise the theory is the exactly the same. The odds don’t matter in the least.

I’m surprised that Yglesias has been making so many elementary thinking errors recently. I think it comes from his putting out so many articles each day. He should slow down and try for a bit more quality.

Afterword

There is another issue with the Martingale system: table limits. If you are at a table where you can bet $1, it is unlikely the table will allow you to bet $30. Of course, you could just go to another table or another casino. You don’t have to play the same game. You could bet $1 on a coin flip, move on to the roulette wheel, and when your bets get above $1000, you could go onto the stock market. The theory is the same. If you up your betters exponentially, eventually you will get all your money back. Plus one dollar!

The fundamental error of economic libertarians is one of faith, faith in the divine efficiency of the almighty market. And, like chiliastic Christians everywhere, market fundamentalists—no matter how many times events refute their articles of faith—can be relied upon to find some handy explanation, usually involving bureaucratic malfeasance, for avoiding the plain fact that any market more complex than a vegetable cart requires regulation. Market fundamentalists believe that if government would simply get out of the way, the goodness and virtue of our enlightened buisnessmen would lead us to a promised land of milk and honey and gold-plated bathroom fixtures. They would be better off attending to the hard teachings of Machiavelli, who observed that “it is necessary for him who lays out a state and arranges laws for it to presuppose that all men are evil and that they are always going to act according to the wickedness of their spirits whenever they have free scope.” This is a fine maxim for business regulation and one well borne out by the housing bubble, as is its corollary: “Men never do anything good except by necessity.”
—Roger Hodge
The Mendacity of Hope

Two years ago today, Damian Paletta interviewed Erskine Bowles and Alan Simpson. And in that interview, they said that a destabilizing fiscal crisis was coming in—Wait for it!—two years. Okay, they actually used a weasel word. The exact quote is, “The U.S. could face a destabilizing fiscal crisis in two years or even sooner.” In truth, the US could face an alien attack sometime this afternoon. But in saying that, it is clear that this is an unlikely occurrence. The Bowles-Simpson claim is meant to imply that the crisis is coming and that two years is the longest that it would take.

It is two years later. Want to know what the status of that crisis is? The government can now borrow money for half the interest rate it could when they said it. But the terrible thing is not that they made this prediction and it turned out to be wrong. The terrible thing is that they’ve been making these predictions for years, they are always wrong, and yet the mainstream media and politicians from all sides still treat them as oracles.

What I think is interesting is that it is standard in journalism to note who a lobbyist works for. If someone is lobbying for a gun manufacturer, it is understood that this might affect his thinking on increased background checks. But in the case of people like Bowles-Simpson and the many other deficit fear groups, the media treat them as objective truth tellers. But they aren’t. These groups are best thought of as good old fashioned conservatives. Above all else, they want to cut funding for Social Security and Medicare and reduce tax rates.

Again, I can’t help but quote Matt Yglesias:

These people are always wrong when it comes to what they claim to be doing. But given it is just a smokescreen, that isn’t surprising. What is surprising is that so many people don’t see that. To do my part, I will here after refer to these guys as Republican lobbyists Bowles-Simpson.

Afterword

Note: Yglesias was specifically talking about Fix the Debt, not Bowles-Simpson, but it equally applies.

Peter Hart over at FAIR notes an amazing thing: ten years ago, Newsweek published an article, right before we went to war with Iraq, that proved that the whole WMD claim was false. The story is mostly about Hussein Kamel, Saddam Hussein’s brother-in-law, who had defected to the United States. The Bush administration used Kamel to make its case for war. The problem is that they were only quoting part of what he had to say.

It goes like this. Kamel said, “Saddam Hussein had a big WMD stockpile, but it had all been destroyed.” He said this back in 1995! But, of course, the Bush administration only reported the first part of what Kamel had said. Now you would think that the rest of the media would pick this up and run with it. But they didn’t. By 3 March 2003, they were far too vested in a great big patriotic war to let the facts get in the way!

This is what happened when Colin Powell spoke to the United Nations in the lead up to war. Pretty much everywhere outside the United States, journalists thought the speech sucked. They thought he hadn’t even come close to proving the case for war. But inside the United States it was one big love fest. Everyone agreed that Powell had hit a home run. Only the French could question that speech! (Note: I mean those in power. All alone with my little radio, I knew exactly what was going on. And I’m sure there were a lot of people like me. It was only hard to understand what was going on if you were an idiot. And that seems to be the base qualification of being important in modern American political life.)

When none of the big news sources picked up on the story, Newsweek did what McClatchy had done before: assumed they must be wrong. (Note: when it comes to the mainstream press, this is always a mistake.) The very next week, the cover story was “Saddam’s War.” It was all about Iraq’s terrifying weapons of mass destruction.

What I’ve learned over the years is that knowing what’s going on is not that hard. All you have to do is pay attention to the news and be a little skeptical. The problem with CBS and NPR and the New York Times is that they have no interest in understanding what is really going on. In real time, it doesn’t matter to sales whether your reporting is right or not. It’s a lot easier to just accept what the powerful say as though they are oracles. But we don’t have to accept that. And increasingly, I think we don’t.

Afterword

It always bothered me that Dick Cheney would leak some information (speculation) to Judith Miller. She would publish it in the New York Times. Cheney would go on PBS and say, “See: it’s not just me who’s saying it; the New York Times published it this morning!” Didn’t Miller see that and think, “I’m being gamed! The whole country is being games!” I think she just didn’t care. She’d gotten her scoop and that was all that matter. The truth be damned! And now that she works at Fox News we know just how much the truth matters to her.

A couple of actresses I like are having birthdays today: Wanda Sykes is 49 and Rachel Weisz is 43. The great Arthur Lee of the band Love was born today but sadly died back in 2006. I saw him that the Filmore not long before that. The great hero of my home town, Santa Rosa, was born on this day back in 1849: Luther Burbank. And in 1671 Robert “Rob” Roy MacGregor was born on this day.

But most of all, we should celebrate this day because Maurice Ravel was born on it way back in 1875. I’m rather fond of him. But for most of my life, I have avoided Bolero because it was so unlike all his other very ethereal work that I preferred. But in recent years, I’ve come to appreciate Bolero. (You might check out the excellent Georgian Festival Orchestra version.) It is a fine and very subtle piece of music.

For this day, then, I offer you Bruno Bozzetto‘s excellent visualization of the piece for his Fantasia parody, Allegro Non Troppo. We can use it to also celebrate Bozzetto’s birthday, since I missed it back on 3 March. Enjoy: