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Sanity Zone 10-28-2010

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Posted 10-28-2010 at 03:54 PM by xan

After watching a bit of propaganda from both political extremes, it occurred to me that people may not know what kind of economic policy options that are available to our leaders. Believe it or not, it’s pretty easy to draw up and easy to understand.

I realize that there is a lot of anger in some people’s attitude toward our government, and it is rightly deserved. Our leaders have screwed up. However, policy options and their effects on the economy and jobs don’t change when there’s a new political party in charge. Blaming the Obama administration for the current situation is like blaming the relief pitcher for the loss, who comes into the game down 18-0 and gives up a run to make it 19-0. It took ten years to get us to where we are, it’s going to take 3-4 years to get out of this mess. No one can hit a 19 run home run with one swing of the bat. There is no magical undisclosed policy option that will create 8 million quality jobs overnight.


The business cycle produces fluctuations in the US economy. We are in a period of recession, where there is slow to no growth in GDP, jobs are lost, investment is down and price levels remain depressed. When pricing becomes weak, employers lower their expectations for output and profits, then fire employees to compensate.


The Federal Government has 4 basic levers to pull to affect the economy. Remember, it takes, on average 12-18 months for a policy change to have a meaningful effect on the economy, if it’s going to have any effect at all.


Since 2009 Practice - Effect
  • 1) Do Nothing BAD – Bush did this for 2 years
  • 2) Adjust the money supply
a. # of dollars in the economy Printed LOTS of money - Good
b. The interest rate 0.5% - Can’t go lower - Good
c. Reserve requirement of lending institutions Raised to Increase Stability - Good
  • 3) Adjust the tax structure
a. Change rates Lowest in 60 years – Massive Deficit - Generally Bad, but not necessarily
b. Loopholes For Wealthiest - Burden shifts to poor (Generally Really Bad, but some people like the poor being poorer)
  • 4) Change the rules of certain markets
a. Standards and Practices - Defines Bad Behavior and Fraud (I'm going to say good, but some people like fraud, or colloquially, "Damn Government keeping me from my God given right to pollute")
b. Disclosure Increased – Sunshine laws work - Good
c. Accountability (e.g., jail time and/or fines) Deterrents to bad behavior - Good
  • 5) Adjust spending on programs Increased – Created 3 million jobs

The current recession began in 2006. Yes, 2006. The tipoff was the inversion of the yield curve (wiki it, for details), which was very deep and endured for several quarters. The economy began growing in July of 2009, though at a very low rate. Total private sector jobs have increased for 7 consecutive months.


Catastrophically bad policies brought about the recession.
Too low tax rates which favored the wealthiest, elimination of regulations that made illegal certain behaviors (like separating regular Commercial Banks from Investment Banks) and refusal to enforce existing regulations (like those that Bernie Madoff ignored) made people not trust our “game”. The Bush Administration feared inflation so much that he raised interest rates to the point that it choked off access to capital and thus growth of small businesses. In addition, the Bush Administration increased spending dramatically on all programs without adjusting for the lack of revenues. Growing deficits produced a “crowding out” of private investment.


When the Obama Administration took office, they had only one policy option available besides do nothing. Tax Rates already were too low to generate sufficient revenues and raising taxes in 2009 and 2010 was not prudent. Interest Rates could not possibly be lowered to help stimulate the economy like in other recessions and the Obama Administration continued the Bush Administration policy of printing $ and spending money like crazy to avoid deflation (which would have been REALLY bad, think 25% unemployment, not 9.6%).

All that’s left is changing the rules of the game. Financial and Health Care reform comprised the two biggest challenges as spending on Health Care represents 15% of our economy and Financial represents 15%. While one might not agree with the new regs, the old regs were clearly destructive. As the rules to balance the game come into force, confidence will rise as fraud and inequity are reduced. The interesting fact is that creating standards and practices actually increases the number of jobs, not decreases them.

Both the Obama and Bush administrations have utilized to the best of their abilities policy changes to diffuse this recession. There have been some differences in the outlook of how involved Government should be in setting Standards and Practices, but given that there is currently no coordinated effort by businesses to self-police and self-adjudicate, the default position in extreme circumstances is Government intervention.

For those around the country who only care about political party and not policy, what was discussed above was clearly not meant for you. Both political parties have a broad range of candidates who have different ideas on what policies would be successful. I urge everyone to vote, but do so because the candidate for whom you chose to vote advocates policies that are based on the REALITIES of the ways our economy works and not the ANGER for the result of past policies.

Voting to undo the recent policies that nearly every economist of all political stripes believes will restore our economy's health would be bad. It's ok to be pissed that the relief pitcher gave up a run, but not ok to put the guy who gave up 18 back in and expect a different result.
Total Comments 3


  1. Old Comment
    Clearly written by someone who is angry at Bush and eager to promote the current administration. There can be no discussion about this recession without tracing it back to its source which began 25 years ago. Neither Bush nor Obama created this mess.

    Which policies that could be potentially undone are agreed upon by nearly every economist of all political stripes? It's pretty obvious you support the democratic policies while you take shots at the republicans for doing everything they can to thwart the dems at every turn. It is a philosophical difference to be sure, and a political practice engaged in by BOTH parties.

    The government (currently and historically) intervenes where it sees fit based on the loyalties of those in office, and those alliances are determined by those who lobby for a certain candidate and/or back them financially. If there is any doubt about this, see the Obama administration's "health care reform" which did nothing more than (a) put millions more on the same system while (b) making health care (ultimately) more expensive. The real problems were never addressed. There was never any plan to do so.

    While you sing the praises of the Obama administration NPR style, trace the history of the melt down that caused this problem to begin with and you'll find it's roots in the democratic party circa the late 1970's.

    I along with tons of other people recognize that we can't hit an 18 run home run, but I also see past the guy currently on the mound. The real problem is the team owner who keeps running these losers out of the bullpen knowing full well they aren't ready for major league hitters.
    Posted 10-30-2010 at 10:54 PM by saintfan saintfan is offline

  2. Old Comment
    Halo's Avatar
    I have enough time to say "THANK YOU Xan" for this blog and "THANK YOU" to saintfan for the comment. There's so much going on here I don't even know where to start. Just an awesome discussion. I'm going to try to attract more people to join in because this is just too juicy to pass on!
    Posted 11-01-2010 at 05:55 AM by Halo Halo is offline
  3. Old Comment
    While I am sometimes a little harsh, I also want to say THANK YOU to Xan. I've learned a great deal in these posts and hope they keep coming.
    Posted 11-01-2010 at 10:43 PM by saintfan saintfan is offline
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