Time for Political Responsibility

The elections last night seem to show an almost schizophrenic American public.   In 2008 they embraced change, giving Barack Obama a massive victory and convincing many on the left that the US was embracing a progressive agenda.  In 2010 the public embraced change again, giving the GOP control of the House by a healthy margin, convincing many on the right that the public was embracing conservatism.    The good news is that the two sides now share power, and that’s a necessary condition to being able to have the long term capacity to solve the problems we face.  The bad news is that this would require the two parties to do something they haven’t been adept at: compromising to pass legislation making tough choices.   Now is the time for political responsibility.

Those reading this blog since 2008 know that I have been intensely bearish on the US and global economy.   I believe we are in the midst of what I’ve labeled “Global Depression II,” the effects of which can be masked for awhile with fiscal and monetary policy moves.   Ultimately we have to deal with a  massive debt, and an imbalance between too much consumption and too little production.   The US in some ways has a harder task than many other industrialized countries.   While other countries have debt — the entire world is in tremendous debt — our imbalance between consumption and production is intense.  Germans still produce more than they consume; we’ve been consuming far more than we produce.

This was not a problem President Obama and the Democrats could fix, and the belief that the stimulus would work makes some sense.  If you stimulate the economy by investing in projects that will increase future production then you might boost growth enough to start restructuring the economy.   However, the drawback of such an approach is increased debt, which risks inflation and currency devaluation.   Since we accumulated so much debt by deficit spending in booms (1982-90; 2002-07), the risks of increasing debt are magnified.

The Republican solution — to balance the budget and live within our means (though that requires more cuts than they’ve suggested) — is good in theory for addressing the debt problem.  Ultimately our debt level is unsustainable, and we need to restructure our spending to take into account economic realities.   However, cutting spending during a recession could drag the economy down further.   One thing Republicans are wrong on is that tax cuts would help.   Tax cuts are an inefficient stimulus, likely to simply increase consumption of foreign goods.   Over consumption of foreign goods is part of the problem.

Simply, the world is in an unprecedented crisis.   Never has so much debt been globally accumulated, and never have domestic policy tools seemed so unable to deliver a solution.    Not only that, but it’s a global crisis, so even if the dollar should lose value due to high debt, the alternative currencies are also weak.   Ultimately, this may be a grand restructuring of the global political economy to the detriment of the US and Europe in favor of Asia and Latin America.    If so, we are only in the first phase.

So what does this have to do with the election?  The public, quite simply, doesn’t understand the depth of this crisis.  They’ll go to Obama in 2008 then to the GOP in 2010, and seem impatient that nobody can fix the problem.   People want things to get back to “normal.”  The opposition arguments, be they Democratic in 2008 or Republican in 2010 are persuasive because chosen policies are if not failing, show no appearance of working.

Although there is no obvious solution to the crisis, a few factors seem clear: a) the US needs to increase production, creating jobs in sectors that produce stuff people want to buy.   This not need be traditional manufacturing jobs — it could be intellectual property or high tech — but it has to be something that can be sold on the world market; b) US debt (and the debt of the industrialized world in general) is unsustainable and must be cut; and c) US consumption of foreign goods must be cut (but not via protectionism).

A Republican claim that tax cuts can grow us out of debt is non-sensical.  Tax cuts could have a positive effect back in the early sixties when we still had primarily a national economy, but even by the 80s and 00s the Reagan and Bush tax cuts were augmented by higher debt.   Tax cuts in a globalized economy lead to higher consumption of foreign goods.   Yet Democratic dreams of expanded government programs and spending also is unrealistic.  In fact, the traditional Democratic “go to” arguments — we will protect social security and medicare — have to called into question.   It’s unrealistic to alter the economy without entitlement reform of some sort.   In fact, it may be necessary to both increase taxes and cut spending.

The problem is that such an “austerity program” would be hugely unpopular.   Republicans who vote for something like that would be in jeopardy in 2012, and Barack Obama would face a serious primary challenge and perhaps become unelectable if he signed something like that.   When the medicine tastes bad, the public yearns for a message “psst, here’s some yummy stuff that will fix you up just fine with no pain.”   Politicians first pay attention to their own careers, and unpopular decisions are avoided.

There is one way it can happen.   A core group of Republican and Democratic leaders — including younger ‘stars’ from each party — need to focus on finding a way to pass legislation that can try to achieve the above goals.   While the Democrats may want an activist government focused on investments and stimulus and the Republicans prefer to leave it all up to the market, they need to find a middle ground.   Military spending needs to be slashed, perhaps requiring a complete rethinking of US foreign policy.    Entitlements need to be reformed and perhaps means tested.   Tax increases may be necessary, both to repay the debt and to cut over-consumption of foreign goods.  Spending cuts on discretionary spending need to be thoroughly reviewed.

Simply, both parties need to agree to sacrifice some of their holy cows.   Both parties have to compromise their core principles.   Both parties have to stop pretending that there is an easy solution — that the market will magically fix things, or government policies will undo the damage.

The result will be a severe recession.   People will suffer.  The hang over from the thirty year party we started around 1982 will be intense.   Structural transitions are heartless.   Republicans will have to accept that we need to care for the people being displaced by the recession, Democrats will have to recognize that this can’t just be transfers of wealth.   In fact, we need to create new productive capacities, and that needs to involve government investment and training.   (To “let the market do it” may not only not work, but could cause unrest and political instability).  Ultimately, the transition will take place.   We can put it off with political theater and electoral shifts from right to left to right to left, or our political leaders can come clean about the scope of the current crisis, and the need for the country to rethink the conventional wisdoms of the last thirty years.   As with any problem, the longer we put off dealing with it, the greater the difficulty in overcoming it.

Too gloomy?   Too extreme?  I hope so.   But I don’t think so.

Advertisements
  1. #1 by classicliberal2 on November 3, 2010 - 19:52

    The U.S. can’t survive as the U.S. if it is to be a service economy, and that’s what it has become in the last few decades. It’s wrong, in fact, to say it “has become” one–that falsely suggests the transition is something that just happened. The people who have benefited from it would love for everyone to think that was the case. Just the “invisible hand,” or the workings of “the global economy.” In reality, it was something that was done on purpose, a consequence of intentional policies adopted over an extended period.

    Hope for cooperation with Republicans can, at this point, mostly be written off as utopian in nature. Earlier this year, congressional Democrats proposed a bill to offer tax incentives aimed at luring companies that have moved production facilities abroad back to the U.S. Republicans filibustered and killed it. Next, they offered up another proposal, this one to eliminate existing incentives to moving production facilities abroad. Again, Republicans killed it. Besides being plain common sense, these would have been two baby-steps toward what you just described (and I’m certainly in agreement with you on the desperate need for U.S.-based production–I may feel even more strongly about it, in fact), but even they were too much for Republicans.

    But while Republicans are particularly bad when it comes to this sort of thing, they’re hardly alone. Conservative elements in both parties have supported the kinds of policies that have brought about the present dire situation. Not because there’s any merit to them. It’s just that the political elite are owned. NAFTA, for example, was the product of lobbyists who stood to benefit from it. Politically, it began as a pilot program launched by Reagan, was assembled as a comprehensive agreement by Bush Sr., then was actually shepherded through congress by a tag-team of Bill Clinton and Newt Gingrich. Among the general population, the liberals, the unions (ever diminishing in strength), and certain tiny right-wing “populist” elements stood against it, but they were totally outgunned.

    Multiply that story by hundreds and that’s how the U.S. ends up without a manufacturing base.

  2. #2 by John H on November 4, 2010 - 14:20

    Thank you for crystallizing the notion that “this need not be traditional manufacturing jobs.” I would take it a step further and say that it CANNOT be traditional manufacturing jobs without protectionism.

    Cogent, thoughtful analysis of the economic problems we face…and thus, likely to be ignored. 🙂

  3. #3 by Mike Lovell on November 4, 2010 - 15:42

    “Earlier this year, congressional Democrats proposed a bill to offer tax incentives aimed at luring companies that have moved production facilities abroad back to the U.S. Republicans filibustered and killed it. Next, they offered up another proposal, this one to eliminate existing incentives to moving production facilities abroad. Again, Republicans killed it.”

    Having been left thoroughly confused over this last year as to what is being brought up/was brought up/should be (in actuality was, but being denied as such or vice versa), I have to ask…in these bills, did they include other actions (since we dont seem to know how to make standalone issues into bills, and instead offer up as part of one bill other completely unrelated stuff) that were deemed bad that forced negative votes?

  4. #4 by John H on November 4, 2010 - 16:14

    Mike,
    That’s a valid point. But you aren’t suggesting, are you, that attaching unrelated amendments to bills is a Democratic-only tactic? I ask only because you say “over the last year” and because I know you lean to the right (which is, of course, fine) 🙂

    These unrelated amendments you talk about are, as often as not, added by the opposition party to force the party in power to vote against their own bills. It’s not always the party in power trying to sneak things through.

    If I misread you, then by all means ignore my post.

    John

  5. #5 by classicliberal2 on November 4, 2010 - 18:51

    “Having been left thoroughly confused over this last year as to what is being brought up/was brought up/should be (in actuality was, but being denied as such or vice versa), I have to ask…in these bills, did they include other actions (since we dont seem to know how to make standalone issues into bills, and instead offer up as part of one bill other completely unrelated stuff) that were deemed bad that forced negative votes?”

    No. The bills (eventually combined) would have denied tax deductions to offshoring companies for relocating equipment and facilities abroad (in Republican-speak–“raising their taxes”), enacted a tax penalty for U.S.-based companies that export jobs, and would have offered a pretty generous tax incentive for companies that import jobs into the U.S. Republican lockstep opposition was (publicly) based on those “tax hikes” against offenders, and on the fact that the legislation would have closed an egregious loophole that allows U.S.-based companies with foreign subsidiaries to use those subsidiaries to shield U.S. profits from U.S. taxes. They argued that U.S.-based corporations are already more heavily taxed than those based anywhere else in the world (which is false), and that this would just increase that burden.

    The bill had majority support in the Senate in September. Just not enough to overcome the filibuster.

  6. #6 by Mike Lovell on November 4, 2010 - 19:46

    John-
    How do you know I lean right…whose been sending out my pics?!?!? Just kidding- I only lean to the right for 2 reasons..1- my left side is bigger so I have to compensate with an opposing lean otherwise I keep walking in circles, and 2- to bring the only one different point of view to my entire family tree! 😀
    and no, I dont mean it is a Democrat thing…the confusion was in all the rhetoric this year…lots of double speak doubled up again on all sides in the public discussions/press conferences/media releases, et al. The earmarking has been happening for years, just been confusing over the entirety of this year because it seems neither side seems to know whats in anything, even if their own damn name is on the bill!

    CL2-
    Okay, thought I’d check on that, since you hear of a guy who votes against his own bill cuz of some appropriations added here and there that muddy the waters. so he tells voters how he saved their bacon by being against issue X, and his opponent tells voters he cancelled out issue Y, thereby screwing them all. but anyways thanks for clearing it up for me!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: