19 September 2012

Election-year issues: the economy

My blog has not been, is not, and will not be political. I will not tell you which party or ideology to support or turn against. That is not my intent.

In the absence of any meaningful dialogue between the parties, however, I would like to offer up some thoughts on some of the issues facing us at present and let you decide which candidate is more likely to do something positive and lasting about it.

The economy is, of course, a major issue. Unemployment is too high and spending is sluggish. The price of houses is depressed. In 2008 there was such an implosion in the financial markets that we nearly went into a second Great Depression. Some people advocate austerity measures to get us out of the current recession, or sluggish recovery, whichever you want to call it. The idea is that if government spends less and collects fewer taxes, employers have more money to hire people with. Others say that the economy should be stimulated: the more people there are working, the more taxes the government gathers, allowing the deficit to be reduced drastically and with it the need for government borrowing. We hear these arguments laid out as if we had no experience to go on which could guide our decision.

In fact, I can offer two examples from recent times that can help us understand what is at stake. After the stock market crash in 1929 there were numerous runs on banks. The government in power took the position that if some banks failed, it would be a good thing: bad, poorly run banks would fold, while strong banks would remain. This situation would benefit depositors. In fact what happened was that more than 9,000 banks failed and money stopped circulating. The next government reaction was to cut spending and so the economy collapsed. The next government stimulated the economy to the extent allowed. There was intense opposition in Congress and blockage by the Supreme Court. Eventually, what stimulation the government was allowed to do began to improve the economy. In 1937, as the economy was growing, the government decided to cut back on spending and the country went back into economic depression. It wasn't until World War II required the issuance of war bonds in huge numbers (i.e. going into debt) that money began to circulate again. The US came out of the war with a vigorous economy that lasted into the 60's. It was the period in which the wealth of the country was most evenly distributed and in which the majority of Americans shared an unprecedented prosperity. That was the real rising of the waters that lifted almost all the boats, though pockets of poverty persisted.

Another case: In the mid-60's Argentina had the highest level of prosperity and the most widespread sharing of the wealth in its history, approaching that of the US. However, in 1966 the military toppled the democratically elected government and in the early 1970's secured huge loans from the IMF. This organization required the government to implement progressively strong austerity measures in order to be repaid. The government spent less and less stimulating the economy and more and more on repaying the debt. Argentina went into an economic slide that by the 90's destroyed its middle class and left business at the mercy of foreign companies which took out more than they put into the economy. Poverty spread to half the population. In the early 21st century, a new government defaulted on the debt, threw out the austerity measures, and set to stimulating the economy. In short order economic activity revived, so much so that in three years enough taxes were taken in to pay off the "unpayable and uncontrolled" debt with the IMF and to free the country of its heavy hand.

It becomes clear that cutting back government spending shrinks the economy and that austerity invariably brings about intense economic recessions or worse. If you're still not convinced, just take a look at what is happening to Europe. Stimulating the economy brings about increased tax revenue that allows governments to pay off debts and keep a balanced budget. During the last 12 years we have waged two wars without either raising taxes to pay for them or issuing war bonds to cover them. At the same time we cut taxes and spending in education, art, humanities, infrastructure, and all the other productive kinds of spending. The result: an aging infrastructure that makes us look poor in comparison say, to the UK, a huge budget deficit (we had a surplus at the end of the Clinton administration), and a collapse in the housing market caused by inadequate regulation.

True, we should never overstimulate the economy to the point of creating rampant inflation. However, more dangerous to the economy are unrestrained financial speculation and government austerity measures.

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