Monday, August 1, 2011

America's Report Card: "F"

By R.A. Monaco
August 1, 2011

Today, the real problems for our nation remain unemployment and a lack of aggregate demand. This is precisely the very same problem that presented 77 years ago during the Great Depression. Monetary policy now, as then, have reached its limits and further decline in interest rates realistically won't have much effect in stimulating the economy.

In order to restore our economy we are now left solely with the tool of fiscal policy to design a plan towards economic health and overcome what is surely to follow--increased unemployment and a contracting economy.

The fact is, that the initial stimulus package that was put into place to counter the full shock from the financial crisis, was far too inadequate and our newly elected president, failed to lead, ignoring the designs of his own commission's solutions, hovering outside the fray of debate. In the words of The New Yorker's Ryan Lizza, President Obama has pioneered a new style of statecraft: "Leading from behind."

Both democrats and republicans with the help of their over the top right wing extremists, have done a completely a inadequate job of explaining why a Keynesian solution would not be the best way to attack a Keynesian problem. Realistically, the explanation is that no solution was really being sought and partisan lines were being re-drawn. But, before we assign a grade to the list of failed assignments, some explanation about the principles of designing an effective stimulus program seem in order.

As an offer of authority, Joseph E. Stiglitz, winner of the Nobel Prize in economics points out that there is ample evidence to support that a Keynesian solution to our troubled economy can be found, not only in our own history of having to deal with precisely the same problem during the Great Depression, but most recently in China. In spite of facing significant shocks to its economy, China deployed one of the world's largest stimulus packages which resulted in one of the strongest documented economic recoveries.

Reflecting back to 2008, Americans must be asking themselves whether congress and the president was actually looking for a solution at all or just engaging in brinkmanship. As a practical matter, economic policies take months to be fully effective and money needs to get into the economy quickly. Clearly, George W. Bush's delay was costly, but President Obama could have hit the ground running and expedited implementation of his own plan instead of leaving this up to congressional debate and partisan compromise. That is, if in fact, he was seeking solutions instead of staying out of the fray of political debate to minimize political exposure while seeking to project an image of partisan compromise.

Standard Keynesian analysis seeks to maximize a multiplier that has an exponential return of government investment spending beyond the dollar's increase in national output. If the government spends money on a construction project, then the workers spend their pay to buy things, and others, in turn, spend their money. Every link in the chain boosts national income making the total increase in national income far greater than the initial amount spent by the government.

But not all spending has the same multipliers. Tax cuts for the rich, who save much of what they have, has a very low multiplier, just as does spending on foreign contractors working outside of the United States, Iraq for example, because the consumption takes place outside the country. On the other hand, increasing unemployment benefits has a high multiplier, because those who find themselves suddenly short of cash are going to spend almost every dollar they receive. Long run multipliers are even larger and policy makers needed to find ways to provide effective spending where benefits are realized two or three years from now too.

Stimulus spending to be effective needed to address the nation's long-term problems such as programs for the elderly, decaying infrastructure and global warming. But at the very least, policy makers should not have made them worse.

As a practical matter, it seems beyond reason, if not irresponsible, that for the entire duration of this manufactured debt ceiling crisis, discussions about the country's debt has never been in the context of balance sheet reality. It is a given that stimulus spending will inevitably increase a country's deficit, but a country's debt only measures one side of the balance sheet--hello, there are two!

Assets are equally important--unless you have all the marbles you want or need. If stimulus money is invested in assets that increases the country's long-run productivity, the nation will be in better shape as a result of the stimulus, while short-run output and employment are increased.

Strong leadership would not have permitted such a narrow discussion about the debt ceiling. What should have been carefully explored by policy makers is the balance sheet benefits of good investments that brought higher future output. Good balance sheet investments not only stimulate revenue generation they improve standards of living today and also improve those of the next generation.

The "I've got mine syndrome" of unfairness in tax cuts, first enacted in 2001 and 2003 by the George W. Bush administration is now owned fully by President Obama, given his surrender last December extending all the Bush era tax cuts. He then surrendered in the spring when republicans threatened to shut down the government and again, in a the most spectacular display of cowardice-- to this manufactured right wing extortion over the debt ceiling--shame! The entire situation would have been a no brainer for Bill Clinton who would have usurp authority under the 14th Amendment and put his challengers to task. But such is the difference between leaders and capitulators.

The principles of Keynesian solution should be fair, they should provide for exigencies and target areas of job loss. If job losses are permanent then retraining workers becomes part of a well-designed stimulus.

In the end, the Obama administration's stimulus helped but was far too little and poorly designed. About a third of the stimulus went to tax cuts--far too much. Investment programs could have been more effective, too little went to help those that were falling through the holes in the safety nets and the states when it could be utilized most effectively.

Indeed, slashing spending while the economy is depressed won't help and predictably, history will show that the timing of these policies made things worse. The fact is that spending cuts will do little to reduce future interest costs while making the economy weaker. To add insult to injury the president surrendered to spending cuts and failed to obtain an increase in revenue.

At the end of the day the continuing current of miserable economic news is largely the blame of a political approach that began with the presidency of George W. Bush and unimproved during President Obama's term. It may be that Obama was dealt a difficult hand, but rather than playing the best hand he had he keep drawing from the deck and folding, time and again.

The debt ceiling debacle on multiple levels is nothing short of a catastrophe. At this point, it is no surprise to working people they're not the fundamental focus of the Obama administration. He has become the black mascot of Wall Street oligarchs and even with all his charismatic statesmanship he reflects yet another failed presidency when there is nobody up to the task waiting to step in.

There's just no possibility that American democracy can govern effectively when whichever party threatens the greatest harm to the nation's economy dictates policy and the president surrenders. The interests of policy makers must be aligned with interest of the voters of this nation--that does not include corporations and multinational companies who are calling the shots while financing political campaigns. Until then, we have no reason to expect anything but more of the same.

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