Wednesday, April 08, 2009

Two ideologies on the economy

Jim Nussle, former OMB Director under George W. Bush, was on CNBC criticizing the Democratic approach to the current economic recession.  He applauded David Walker's rheotoric against deficit spending an went on to say that we should get out of this recession "the way we always do."

He likened the current leadership to a drunk at the bar and said that Europe "lectured America on the ills of socialism."  Really.  I think what happened is that leaders in Europe pointed out that they already have the social safety nets that the US needs to fund and put in place wiht universal health care the main objective.

Nussle said that we need to promote business and employment, but he failed to admit that health care costs are the fastest rising cost to empployers and the major barrier to increasing employment (or limiting layoffs in the recession) for small business.

The fact is that under Republican control we spent like drunks too, the only difference is that the expense went to unncessary and mismanaged war.  Just think what the trillion dollars would have done for American schools and health care over the last decade.

Now we have a global depression lurking at the door due to a deflationary cycle.  We have twoideologies from to choose. Spend money or save money.  Obama, Bernanke and Congress have opted for the former as a way to stimulate the economy by creating jobs.

Imagine the alternative.  Let's not spend any money and let's balance the federal budget over the next 24 months.  Unemployment, now at 10% on it's way to 12%, would rise precipitously to 15 or 20%.  This would likely shatter the already structurally damaged economy.  Reduced consumption would further reduce industrial production which would lead to more layoffs, and the vicious cycle would continue.  This is exactly what happened during the last deflationary recession which was called the Great Depression.

During the 1930's the conomy was not as global and stimulation could be immediately accomplished by putting dollars in peoples' pockets which would go to domestically manufactured products and increased domestic industrial production.  Today many of those dollars would go overseas for consumer products, so the approach has to be nuanced.   Obama's plan is such a plan.

The proposed plan is three-fold: 1) Direct stimulation and immediate spending.  This is accomplished by increasing unemployemnt insurance, direct payments to individuals and lower home mortgage rates.  The advantage is that money is pumped into the economy immediately, the disadvantage is that much of the money goes overseas for imported consumer products.

2) The second part is Keynesian government-funded programs such as infrastructure rehab, transportation projects, education improvemnt, job training and health care funding.  The advantages are that this spending leads  to predominantly domestic stimulation and is value-added with increased long term economic growth coming from a better educated and healthier human resources as well as improved roads and factories for increased efficiency.  The huge disadvantage to this part of the plan is that it takes 18 to 24 months to implement and by then the economy could past the point of rescue.

This potentially has the greatest long term effect and I would argue that if --- IF-- the previous administration and Congress had been alert and proactive and had avoided the huge Keynesian spending in Iraq, we could have diverted those funds to our own domestic spending, which would have given us universal health care, free college education for all and improved and light rail inevery city.  Very regrettable indeed.

3) The third part of the plan is tax cuts, especially for small businesses and middle income people.  Reduces federal tax revenues in the short term, but potentially increases economic growth in the intermediate and long term.

For my money, I would rather spend less and emphasize the needed infrastructure and health care spending, but unfortunately we need immediate stimulus too.  Obama's plan is as close to perfect as it gets. One-third is devoted to each of the three parts of the plan.  We are indeed in bad straits and nobody knows if such enormous spending will work.  The deficit projections are daunting and rely on a large and quick turn-around in GDP.  If it fails, and it may, then we are destined for possible disaster.

But doing nothing is assured disaster.

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