Debt Limit Experiments

[tongodeon]

Field experiments and natural observations are two kinds of tests that aid in understanding big complex systems. In the former, you verify your theories by messing with the system and see how it reacts. In the latter, you make inferences from observing the system as it behaves normally. An observer might watch a colony of beavers working on a dam

Comments

[mmcirvin]

It's not a field experiment. In a field experiment there's an understanding that you'll reject your hypothesis if you turn out to be wrong.

[loic]

We're not actually going to default, we're just going to be forced to dramatically cut services and benefits and pay to public servants. Mission accomplished, Tea Party Douchebags.

[mmcirvin]

What concerns me is that we seem to be in a politico-economic positive feedback loop. The conventional wisdom of almost everyone in the US, Democrat or Republican, concerning government spending is upside down; everyone seems to believe, on the basis of vague memories about the Reagan administration, that cutting spending stimulates the economy.

So if we cut spending, and all those out-of-work public servants stop spending the money they don't have, and a bunch of bridges fall down and poor people have to choose between food and housing, and the economy slows down even more, the solution must be to cut more spending.

I'm trying to figure out where the bottom is here. Bonus Armies marching on Washington, or something.

[loic]

Right. Even the political middle-ground in 2011 USA is shrill and irrational. The idea that tax is theft and that government is bad is just basically stupid.

I'm kind of hoping that things go badly. Badly enough to change the discussion.

If we assume that we won't default on debt then cutting 1.4B from the budget means cutting 50% from the budget. That would be pretty incredible. And would totally fuck the economy. Not to mention out of work public servants cutting benefits would have a huge impact on consumer spending (since benefit recipients are likely to be spending everything every month). Cutting 50% from the military would probably mean stopping paying soldiers entirely, not buying more weapons and turning off the AC in Afghanistan.

I think you'd see armies marching on Washington.

[mmcirvin]

The mind-boggling thing is that Europe is caught in the same loop. It particularly seems to have infected thought in the UK and Germany.

[mmcirvin]

The jokes people are making over on John Scalzi's blog are an interesting gauge of unconscious assumptions. Most people seem to think that the US dollar is going to drop like a stone, because that's the only kind of economic crisis they can imagine, and they assume it would be a horrible thing.

Maybe it will! But would that be so bad? Our debts are denominated in dollars. And, sure, imported stuff from China would get harder to buy (and that would screw them hard, and in the short term it would be bad for people like me whose products complement imported goods) but it would suddenly make American labor and goods pretty attractive.

But on the other hand, there's hardly any consideration there of what a deflationary spiral would be like. Nobody remembers a deflationary spiral. That didn't happen under Jimmy Carter.

[loic]

People forget how many things they enjoy buying cheaply from China. For American salaries to be competitive with Chinese ones the dollar would have to drop so low that nothing manufactured abroad would be affordable. The workers in China make about $150/month. So if the US dollar dropped to 1/10th of its current value that would be competitive.

Of course then the US would cease being the world's reserve currency and we'd have to pay the same kinds of interest rates that the rest of the world pays.

[epileptikitty]

How macro finance fits together is not simple, and popular explanations are generally inside out:

http://www.atimes.com/atimes/Global_Economy/MG27Dj02.html

Steve Keen: The Roving Cavaliers of Credit

And for continuing education about economics, read Naked Capitalism.

[jonsan]

Can anyone explain the particulars of the atimes article in simpler terms? I'm fairly ignorant when it comes to economics and I'm not sure I fully understand what the writer is describing.