Sunday, September 25, 2011

Is It Economics or Politics? Part 1

What is going on in Washington and in the early stages of the presidential electoral process?  Are the core issues economic--deficits, entitlement over commitments, unemployment--or do they have more to do with political theory?  At first I thought this was all about the economy and how to recover from the disastrous recession worsened by unbridled speculation. However common sense responses to these economic challenges seemed to gain little traction.

After all the sensible approach--the one endorsed by almost all economists--is that the federal government should continue and probably increase stimulus expenditures in the short term in order to sustain demand in the economy and thus assist in the recovery from the Great Recession.  At the same time, long term changes are required in terms of expenditure reduction and revenue increase so that the structural and long term deficit is reduced. Admittedly this is a tricky course of action and one that requires leadership at all levels. Never has it been more true that "everything has to be on the table" than it is right now. But to let a concern with the deficit overcome a proper concern about recovery from the recession will follow the same disastrous path taken by Japan in the 1990's, its "lost decade."

There is a focus on the jobs issue, and rightly so.  As long as unemployment is at 9+%--actually probably more in the middle teens since those who have stopped looking are not counted--consumer demand, the mother's milk of the U.S. economy, cannot possibly be strong& enough to support a recovery. It would seem that the problem is how to create jobs by somehow encouraging businesses to invest in new products and services and thus hire the people needed for that investment. The problem is that in general U.S. businesses are sitting on a huge amount of cash but are unwilling to invest because there is not sufficient demand. This is the classic reason for government stimulus to create the demand that then creates the jobs that then further increase demand, but consumer demand this time. So how come we don't agree to do this?

I think the answer is that the agenda of many in Washington has more to do with political philosophy and not economics.  I believe they are using the economic woes of the country to justify political actions that will materially weaken the central, that is federal government, in order to implement what they believe to be the fundamental political principles of the American experiment. Flying under the banner of "no new taxes" and "we must reduce the deficit," are a powerful and coherent group of conservative activists whose true agenda was aptly described by Grover Norquist, "I don't want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub."  

To be continued...

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