Sanity Zone 10-28-2010

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.

Definition

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.

Proposal

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.

Policy

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

Situation

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.

Analysis

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.

Discussion

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.