Saturday, July 25, 2009

A Skeptical Look at the Economy

The last decade or so has been one giant roller coaster, economically speaking. It may seem like a long time ago, but in the late 20th Century, the United States actually had a balanced Federal budget. The head of the Federal Reserve, Alan Greenspan, actually had a moment of worry about the US having too large a Federal budget surplus! As we now know, he needn’t have worried about the surplus.

The stock market was booming and reached an inflation adjusted peak in the year 2000. Unemployment during the Clinton presidency fell to levels of about 3% - does anyone remember that? It seems to be just a dream to us now.

One of the reasons for the good economic fortune back then was absence of wars bleeding our treasury and distracting the US economy away from more prosperous endeavors as well as a balanced budget. Peace is good for the economy, war inevitably is destructive. Why?

The quick answer is that when a country is at peace, human effort and labor is more directed toward products that make life better; confidence is high among producers and consumers and the cycle of productivity grows, leading to an actual improvement in people’s lives and an increase in the wealth of a nation.

During a war effort, the end products are more often destructive and lead to misery for someone, somewhere. The wealth of nations is decreased by war because of the destruction inherent in wars. Wars may serve to preserve our freedom which is worthwhile of course; but war only serves at best to maintain a status quo economically and socially. At worst, wars destroy freedoms and liberty if they are unjustified. The righteousness of a war is everything; an unjust war is doom to a country, both morally and economically.

After 2000 the stock market experienced a “bubble”; the prices of stocks related to the Internet were valued beyond all reasonable expectation and the NASDAQ index reached the 5000 level. The bubble burst when many companies failed to turn profitable and could not justify such prices. Easy monetary policy from the Federal Reserve enabled the speculators who inflated the bubble – and much wealth was destroyed when the bubble burst. The NASDAQ still is over 60% lower today than it was then, which is almost 9 years ago.

With a new president in place, an ill-designed tax cut following the recession caused by the bursting Internet stock bubble was implemented; the major beneficiaries were the wealthiest taxpayers. That was the end of the surplus. Although the stock market partially rebounded, the bang for the buck was poor; employment and income for the non-wealthy lagged.

Then came 9-11 and we were on our way to a non-righteous war – in Iraq - that not only wiped away any semblance of fiscal sanity, but completely replaced it with economic delusion.

Ridiculously easy credit and lax regulation led to a housing bubble that peaked in 2007. When foreclosures started to become a big problem, banks and mortgage backed securities began to tank. Soon, literally no one could find a lender willing to lend and business and consumer spending came to a screeching halt.

The enormous deficits that have resulted from the ineffective tax cuts of the Bush Administration and the Iraq War, not to mention the Plan D Medicare giveaway to the major drug companies, have left us ill-prepared for the banking and housing crises that we are still suffering through. Ten percent unemployment is now a near certainty and the future looks grim.

Have we learned anything? Is the Obama Administration any better than the previous one?

There is no doubt that this administration is going after the problems more directly but unfortunately, for reasons of politics and popular sentiment, good solutions to difficult problems may elude us.

It must be admitted that the banking crisis which, if left unsolved would have led directly and swiftly into a depression, has been averted for now. The crisis is now just a lingering problem which will slowly return to “normal” unless a descent into a true depression occurs. Whether laws will be passed that will avoid future crises and banking abuses is unknown; if politicians were not involved, our chances would be better. Ideology is the enemy here as usual.

Similar comments could be made about all our other economic problems; health care, unemployment, the stimulus program, the federal deficit, and so on. In every case it seems that President Obama has the right idea; it also seems that in every case, Congress, to which the President has delegated the task of creating legislation addressing these issues, is not up to the task. Although the President highly values consensus and bi-partisanship, it may be that his preferences and ideas are better than consensus, the results of bi-partisanship or the ideas of the rest of his own party. His penchant for cooperation and delegation may not result in good health care reform.

This country desperately needs to reduce the cost of health care as a % of GDP while increasing the access of all Americans to healthcare (please note that it does not matter whether the solution is private or public). This may mean lower profit margins for the health care industry as they serve more people at a lower cost per person. Who has the nerve to publicly promote this kind of necessary policy?

The deficit MUST be reduced (please note that the amount of government spending is not the key issue, it’s the deficit). The government must stimulate the economy and increase employment while avoiding pork (please note that the stimulus must lead to productive labor, particularly involving infrastructure). This may mean higher taxes but if the budget is balanced and jobs created, and we are getting value for our taxes, ideology should not derail this solution. Are there elected officials who can balance all of these attainable goals?

It is hard to believe that most of our leaders are capable of putting ideology aside and doing what is most necessary. It is more likely that we will bounce from one emergency to another.
What do you think?

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