Why You Think We’re Stuck

May 8th, 2012 at 4:57 pm

I posted this piece the other day with some thoughts about why many of the advanced economies seem to be stuck in a world of bad economic policy.  I gave you my reasons and asked for yours.  Here’s some of what you came up with (h/t: HS; I edited lightly).

We’re stuck because Obama hasn’t pushed for useful measures and Republicans have blocked what little he’s tried…

A weak economy means lower labor costs, even though the weak economy may also hurt revenues. Lower labor costs are cash today; whether better policy would lead to higher revenues is an open question. A lot of current policy is aimed at weakening workers’ ability to get paid more, such as cutting the safety net, increasing competition from other countries, anti-unionism, anti-inflation hysteria, etc., etc.

Perhaps this simply falls out as a special case of US Politics, but I certainly believe that the “anything but what Obama wants” camp accounts for a large part of what’s happening…there’s a deep-seated belief that President Obama simply must be opposed, regardless of the results or source of that opposition.

… There is absolutely nothing that Republicans believed four years ago that they would not gladly deny and call a Communist plot to take over the universe if President Obama endorsed it.
Cap-and-trade, the individual mandate, banning light bulbs, ending the war in Iraq. The commitment to oppose everything they previously endorsed has simply become absurd (and painful) to watch.

Add up the sectoral balances. The domestic private balance, the external balance and the govt balance always sum to zero as an accounting identity. If non-govt is running a surplus, then govt must run a corresponding deficit. A non-govt surplus means that non-govt is net saving, and saving results in demand leakage.

Non-govt can only save what govt will fund with its deficit. If the deficit doesn’t make space to fund non-govt saving desire at full employment, then the economy contracts due to lack of effective demand. The deficit is too small given saving desire. Of course, increasing net exports would reduce external saving in US dollars, but that is not about to happen given the global economic situation. Therefore, the federal govt must increase its deficit to offset the demand leakage resulting from increased saving desire in a “balance sheet recession” resulting from an unsustainably high level of private debt to restore effective demand to a full employment level, i.e., adopt a full employment budget.

I think we are stuck because we never adequately addressed the root cause of the financial crisis: lousy home loans. If the bailouts of the banks had required that they also take serious hair cuts on the bad loans they made and in turn bailout home owners, then we might be much better off. As it is, fiscal stimulus has faded out and home prices have yet to find the bottom. This also keeps low interest rates from being stimulating as no one wants to buy houses until the prices stop falling. This might fall under your vested interests category, as the bank lobby got what it wanted in spite of being the cause of the problem.

While there are people who want to go after Obama at any cost, I think the vast majority of them have convinced themselves that being stuck in an economic slog is actually a good thing. They don’t think they are destroying the economy, but the facts don’t matter to them. Showing them that they are destroying the economy makes no difference.

There are the vested interests, the rich people who look shortsightedly at wanting a tax cut. They don’t see the facts that rich people have had higher after-tax income when there are higher tax rates.

And there is a lot of disdain for government. People see others getting government benefits but fail to see the benefits they themselves get. They don’t see that the Internet came from government, along with all the business that created. They don’t see they the products they sell come through government ports on the basis of government trade agreements.

All these problems come down to one big problem: most people are too lazy to become informed, and/or they find reality uncomfortable and don’t want to deal with it. So it’s much easier to sell them simplistic bumper sticker solutions to the complicated problems of the world than it is to explain what’s actually going on.

For the wealthy, life in a stagnant economy is no different than life in a growing one. In fact, it’s much easier to deal with a powerless labor force than having to compete for scarce talent. Having a safe place to store your wealth until the “storm blows over” is more important than taking a chance on these safe havens becoming less secure just to achieve greater employment, and having inflation erode the real value of your assets is much more troublesome than high unemployment…

The real pain is concentrated among a powerless minority that has no choice but to endure it based on existing laws. If the costs of an output gap were paid for by the entire population, there would be much greater political will to do something about it. There are no unemployed among the decision makers. If the markets were forced to be open to all participants or the victims to be fully compensated for having the markets closed to them, the pressure to act would be overwhelming. Having the ability to dump the entire cost on a small powerless group creates a disastrous and inequitable incentive structure for those with the power to implement solutions…

“We” have nearly $60 trillion in wealth and $15 trillion in annual income. We don’t really have a money problem, we have a money distribution problem. If the “bond vigilantes” become a serious problem down the line we can always implement wealth taxes to pay the debt down and eliminate the problem.

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One comment in reply to "Why You Think We’re Stuck"

  1. Michael says:

    When I elected Obama, I did so in the knowledge that he would face this kind of opposition. I’m not ignorant by any means, but I’m a casual political observer; I don’t work in the business.

    Why did I know what Obama refuses to?