Monday, November 21, 2011

Long Term Economic Policy

There is no way that the Super Committee is going to reach an agreement by the deadline.  Fortunately, there is also no way that the automatic cuts are going to go through, at least not in an election year.  Phew.  Because if you live in a Medium-Sized Midwestern College Town, Department of Education spending pretty much supports your town's economy, and any cuts in that means that I may have to resort to poll dancing in my spare time instead of blogging.

The issue at hand is the concept of Long Term Economic Policy.  When the economy imploded in 2008, Henry Paulson and George W. Bush jettisoned their Neoliberalist Economic Policy that allowed Lehman Brothers to collapse, for Keynesian economic policies that did succeed in preventing the United States from embarking on an economy based on bartering for loaves of bread.  Guess what?  It worked.  Portions of the bailout even created a profit for the government, which is mitigating the failed financial investment in Freddie Mac and Fanny Mae.  It's a classic Keynesian maneuver, that when the private sector fails to invest or spend money, then government steps up to supply spending that will try to even out the dip in a recession, especially by keeping people employed longer than they would have been otherwise.  To me, the stimulus package was not large enough, and the government sold their interest in the banks way too soon without making permanent changes to the structure of these institutions.

The problem is that sound Keynesian economic policy triggered by telltale signs of underemployment equilibrium, was replaced in knee-jerk fashion by the idea that the government should be run like a corporation and debt is bad.  Policies that allowed deficit spending to grow the economy (and then, debt becomes a smaller portion of GDP due to the growing size of the pie), were addressed in crisis mode, when the crisis truly was that unemployment was creeping towards 10%.  If the Super Committee does cut spending, the economy will contract, and debt as a percentage of GDP might start to reach Italian levels.  (Okay... it's not THAT bad...)

Even more troubling is that a number of Tea Party politicians who pushed through the debt ceiling deal is that they truly believe that government doesn't play ANY role in the economy.  Or, that they heard that Hayek and the Austrian School said that the economy is too complicated to mess with, liked that, and can regurgitate this line on Sunday Morning Talk Shows.  (To counter with Ostrom, just because an institution is complicated, does not mean it is not efficient.)  There seems not to be any idea about real economic policy behind their actions.

We are not Europe.  We have one currency, one Federal Reserve Board, and one Treasury Department.  We could have one regulatory agency if we actually wanted to regulate anything.  The problem is that we can't pick and choose long term economic policy every year.  We have to stick with something for more than one election cycle.  Even Nixon and W. ended up going with Keynes, kicking and screaming, so why not give that a 4 year presidential term to see how it shakes out.  We did elect a President to lead... and... where is he?

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