The cries for relief from the economic recession reached a state of pure, irrational cacophony with the recent request by the pornography industry for a government bailout. While many will likely reject the very idea of such a request out of hand, it fits in with the popular focus of how to pull us out of this significant downturn. “Saving jobs” is all anyone seems to care about. While it is annoying and painful to lose a job (I lost my own job in November partially as a result of the crisis), the job loss is the symptom, not the disease. Even the “credit crunch”, which caused so many closures in fringe firms and industries, is still an intermediary between the disease and the symptoms. While I will not get into the precise cause of what I have termed the “disease” here, which has a multitude of possible causes being widely discussed by professional and academic economists, I will go into how the new administration should deal with improving the economy in the medium to long-run over short-run “solutions” that will come back to bite us later.
1. Raise Interest Rates. It is well-documented empirically that it takes somewhere between eighteen and twenty-four months for a change in the money supply to fully work its way through the economy. Interest rats where they stand now are at an unstable level, whereby the Fed is effectively giving money away to banks. That form of subsidization distorts the economic realities banks face. To lower interest rates to the level they are at right now, the Fed continually needs to expand the money supply at ever expanding rates, which results in some of the highest annualized inflation rates in almost two decades (upwards of 6%) that we’ve seen in recent months.
Bernanke must return to the “inflation-targeting” philosophy he has promulgated in the past. While I don’t agree with Bernanke’s economics on any level, the spirit of such a philosophy applies to exactly these types of situations. While he may not be afraid of using the keys to the printing press, inflation above a “normal” level isn’t going to help anything in the medium run.
When he takes office, Obama must not look to the Fed as a revenue source. He cannot expect the excessive liquidity provided by the fed to continue and should support its elimination. Funding of greater government spending must come from taxation, not from the printing presses.
2. Eliminate Public Debt. There have been frequent complaints that the remaining solvent banks have not been willing to loan money as quickly as they have been in the past. The fallacy of such complaints is twofold: One, that the ease to which banks lent in years past was very likely one of the factors that got us here in the first place and what banks are doing right now makes sense, and Two, that the government can easily make a dent in the credit crunch simply by eliminating its debt. The “true” cost to the government borrowing lies in that, through the sale of treasury bills, it takes money (crowds out) from private bonds. The treasury bills, since they are riskless, effectively set the floor below which no private bond will ever be sold. If debt is eliminated and this floor drops, the option of raising money by floating a bond, which beforehand was unprofitable for a firm, may now make sense. Eliminating this debt is very simple and requires no further bureaucracy to get set up; just swap a few items in the treasury’s ledger. While the debt is Bush’s fault and his mess, Obama must be the one to clean it up.
3. Get out of Iraq. We need to reduce military spending drastically. Once that state is stable enough, or it is determined that we can no longer do any good, we need to pull out completely. Each dollar spent there could go towards a tax cut, elimination of our debt, or building infrastructure, all of which improve the economics of taxpayers far more directly than marginal improvements to the security of the new Iraq state. To Keynesians who believe that our spending there helps in the same sense that paying someone to dig a hole and fill it helps unemployment, I disagree since I see little evidence that our economy is in such an extreme situation. A tax cut will go straight towards the areas of consumption taxpayers have had to give up in recent months (such as retail), spurring job growth, or to paying down debt, keeping the banking system solvent and increasing its profitability. Paying down the debt would help growth even more directly through the means I mentioned above. While the current recession may appear more closely to the Great Depression during which Keynesian methods were supposed to have worked versus the cost-push stagflation during which Keynesian methods failed, those methods appear to me to be cosmetic. We are far from needing to resort to spending for the sake of spending, whether it be in the military or in social programs, in the current economic situation.
4. This is an ok time to build infrastructure, but don’t be stupid about it. With all that being said, now does seem to be the time to use government spending to spur internal improvements, but I only say so with significant caveats.
- Don’t determine a certain amount of money to spend and keep spending until you hit it. Congress must force good opportunities to come to it instead of seeking them out. We want the public spending first to help citizens in real, genuine ways that private firms have problems providing. We should not be spending arbitrarily just so someone can have a job.
- Don’t use this as an opportunity to support green infrastructure. These forms of technology are only asked for right now in areas of relative affluence, and as such, support of them is a subsidy to the rich. Green infrastructure must remain in the hands of local governments in the interests of their constituents rather than a holistic macroeconomic plan.
- Don’t do anything the states can’t do themselves. If something only benefits one or some states directly, the state can make the judgment on its own whether it is worth to tax and spend on the infrastructure. Anything else quickly degenerates into pork belly-seeking situations.
5. Let the industries and firms fall. If the market says too many cars are getting produced, the government should not be in the business of promoting such a level of production. Not all industries are failing right now; such failure says something about whoever does. An unprofitable business model has no place in society unless someone is willing to support it charitably. Let the market determine where those people are best utilized elsewhere. We have had no problems letting that happen in 2001 with tech firms. Perhaps that was because it was so easy, in hindsight, to see why dot coms were so stupid. If the business models of the auto makers, retailers, financial firms, and pornography studios have been unable to withstand the crisis, the market is rejecting their usefulness. We need to stop looking at the jobs being lost and instead remember that all jobs must ultimately serve a purpose. The purpose of many of the firms within those industries has ended.
The economic downturn is ultimately a systemic problem. However, we don’t have clear evidence has to what exactly caused the system to fail, but we can fix the intermediary factors that contributed to such a failure and avoid screwing it up more. The question should not be about eliminating job loss, but about ensuring that the system is set up in such a way that the remaining private firms can find new, better roles for them as soon as possible without causing further problems later.