Tuesday, November 29, 2011

How to Solve the Economic Problem; and Why We're Not

A welcome to readers of Economists View -- and a thanks to Professor Thoma for the link.

The economic situation really hasn't changed much in the last 12 months.  The US economy is still barely growing, meaning the high unemployment rate won't get much higher, but also won't get much lower.  The EU is still in the middle of a dire financial situation which is helping to keep a lid on economic growth, while China is still working at lowering inflation (although they are close to the end of the endeavor).

So -- how do we actually end this situation? From Bill Keller of the NY Times: 
But while there are things a columnist can ignore (if Kim Kardashian ever features in this column, just shoot me), our failing economic ecosystem is not one of them. So for the past several weeks my airplane and bedside reading has consisted of sexy documents like “A Roadmap for America’s Future” and “The Way Forward” and “The Moment of Truth” and “Restoring America’s Future” and “Living Within Our Means and Investing in the Future.” I’ve also reached out to a few economists respected for the integrity of their science and their patience with economic illiterates.

The first thing I gleaned from this little tutorial will probably not surprise you: There really is a textbook way to fix our current mess. Short-term stimulus works to help an economy recover from a recession. Some kinds of stimulus pay off more quickly than others. Once the economic heart is pumping again, we need to get our deficits under control. The way to do that is a balance of spending cuts, increased tax revenues and entitlement reforms. There is room to argue about the proportions and the timing, and small differences can produce large consequences, but the basic formula is not only common sense, it is mainstream economic science, tested many times in the real world.

Yes, there is  a simple way to solve the problem.  And while I've been over it many times, let's revisit it again.

1.) Borrow money.  Despite the incredibly stupid complaints of people about federal spending, the bond market isn't worried about the US' fiscal situation right now.  The 10-year bond is trading right around 2%.

2.) Rebuild the nation's infrastructure: According to the society of civil engineers, the US' infrastructure gets a grade of D-.  I recently noted a story from AgWeb that also illustrates the problem.

3.) Hire people to do the work.  Considering that half the un\employed are blue collar workers (people that do things like ... construction) this would lower unemployment -- which also happens to be a big problem right now.

4.) This increases aggregate demand, which increases GDP.  Once you get GDP growing at 3%+ for a few quarters, the economy because self-sustaining.  This also helps to halt the debt/GDP growth rate. 

SOOOOOOOO why don't we do this?
So what’s the problem? Why is our system so fundamentally stuck? Partly it’s a colossal, bipartisan lack of the political courage required to tell people what they sort of know but don’t want to hear. Partly it’s a Republican Party that, for its own cynical reasons, wants no deal with this president. Partly it’s moneyed, focused lobbies that swarm in defense of specific advantages written into the law; there is no comparable lobby for compromise, let alone sacrifice.
Let me address the political problem, because I think it's the really big elephant in the room.  The Democrats can't lead.  Period.  The president sends a proposal to the Republicans and then offers the "pre-compromised" version before negotiations get out of the gate.  He has yet to figure out that he is hated -- as in really hated -- because of what he symbolizes: the end of the WASP power structure as we know it.   And Congressional Democrats have no backbone.  Case in point: perennial pain in the ass Joe Lieberman should have been given an office by the janitor (with an apology to the janitor) along with every meaningless committee assignment possible.  Instead, he's a media darling. 

Republicans now have the luxury of living in a fact-free world thanks to Fox news and talk radio.  Ever wonder why a mere 6% of scientists consider themselves Republicans?  Because Republicans are now completely fact-free in a majority of their statements and policy proposals.  Here is but one example: sometime over the last year, Paul Ryan proposed a new budget plan with economic analysis provided by the Heritage Foundation.  The plan started to unravel after Paul Krugman noticed the plan projected unemployment at 2.3% at the end of the decade.  After that, a group of people (of which I was one) shredded the plan -- as in demonstrated that it was put together by a third-grader with a crayon.  It got so bad that Heritage eventually took it down only to erase the more egregious assumptions.  That's just one example of how fact free the Republican party has become. 

The point to the above two paragraphs is simple: our political system is beyond broken and dysfunctional.  I'm not quite sure where that is, but I do know it's a really bad place to be.  And that is why watching the train-wreck that is the daily news is so frustrating: solving the problem is easy, but our political system has become so dysfunctional as to prevent that from happening.