In Economics and the Welfare State: Oil and Water we discussed the flaws of current economic policy. The Federal Reserve continues zero interest rates and quantitative easing in hopes of controlling interest rates, the stock market and re-igniting inflation. The Administration and Congress are locked in a meaningless battle over the debt ceiling and budget cuts. We are in a morass. Where did we go wrong?
The Failure of the Two Party System
The current budget and debt ceiling debate demonstrate the intellectual bankruptcy of the two party system. We are saddled with an annual federal budget deficit of $1.6t. We can only expect this number to increase. Congress and the Administration have agreed on a deficit reduction of $38 billion which in reality may be a reduction of an even more paltry $353m. See $38 Billion in Cuts? Make that $353 Million.
While Americans believe there are major differences between the parties, is there really a large ideological divide on economic matters between Democrats and Republicans, liberals and conservatives? A close analysis reveals little difference. And they both close ranks in support of the Central Welfare State. Wittingly or not, both parties have weakened regulatory oversight. Both parties participate in bureaucratic fiefdoms immune from budget cuts.
Thus, we see support for:
- Dysfunctional health care
- Medicare
- Defense spending
- Foreign military adventures
- A tax code laced with corporate loopholes
- Social security
- Crony capitalism where losses from the financial system are transferred to the public
See Paradoxes at the Heart of the Conservative Project, Paradoxes at the Heart of the Progressive Project.
The Pernicious Federal Reserve
For almost three years, Fed policies have had a deleterious effect on the economy. Every few weeks a Fed spokesperson announces while there are signs of economic growth, it is too soon to raise interest rates or end quantitative easing. See, e.g., Bernanke Sees Economic Growth Through 2013, Fed’s Yellen Says Economy’s Improvements Don’t Warrant Exit from Stimulus.
Perhaps the Federal Reserve’s continuous support for the economy through its easy money policy is the cause, not a consequence, of the economy’s weakness. The Fed has created a dangerous co-dependency. Analogizing the Federal Reserve’s pathological support of the economy to patients on a ventilator, Brian Pretti found:
…the fact is that the longer a patient remained on a ventilator, the greater the chances they would not be able to be weaned off of the machine. The body “learns” not to breathe on its own after a period of time. Essentially a patient would pass a critical window of recovery weaning period opportunity.
Pretti uses the example of the Japanese economy:
…this analogy is incredibly apt in terms of describing the reality of the sovereign debt fiscal trap. The longer Japan has been on the artificial zero interest rate “breathing machine” over the last decade plus, the harder it has become to wean itself off. Although I could spend an entire discussion on Japan alone, I personally believe Japan has already passed the critical “weaning period” demarcation line for zero bound interest rate/monetary policy. We’re Just Gonna Inflate Our Way Out of It?…Oh Really?
Current Federal Reserve policy is mirroring the actions of the Japanese central bank.
We Need New Policies
We cannot sustain the current economic path. David Stockman, in a CNN interview with Elliott Spitzer, laid out simple, workable solutions. We must enact budget cuts and increase tax revenues. We must significantly cut the defense budget and civilian entitlement programs. The Bush era tax cuts need to end.
http://money.cnn.com/video/news/2011/04/12/n_stockman_0412.cnnmoney/
Stockman is advocating what I have advocated before: shared sacrifice. In his words, the “wolf is at the door.”
Failure of Business as Usual
Continuing business as usual will result in a financial crisis many times the magnitude of 2008. We need to cut deficits, raise taxes, end Federal Reserve intervention and end profligate Congressional and Administration spending. We need to give this sick patient, the economy, a chance to breathe… before it suffocates.
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