A Basic Economics Lesson

The election is now just days away, and the single greatest measure to see if a president is going to be re-elected is the economy. No president has ever been re-elected with an unemployment rate above 8%, yet president Obama only recently brought that rate down to 7.8%. Why is this recovery so slow?

The recovery is slow because of our own doing. We did most of the necessary things at first; bailout the bad banks, the auto industry, and then a lot of emergency relief through the stimulus. But what the Obama administration failed to see is the depth of the crisis, and it probably needed to do more with immediately helping troubled homeowners to relieve household debt. But that depth was something difficult for government officials to really grasp, and it would have been difficult for more aid to be passed through the already tense congress.

Here’s where the self-infliction begins. On a matter of fact, the problem is rooted in the obstructionist and austerity policies of the Republican Party. Since sweeping into office in 2010, Republican governors like Scott Walker and congressman like Paul Ryan have been pushing the idea that the only way to prosperity is to slash government spending and shower businesses with tax breaks, and therefore have been opposing any legislation increasing spending or taxes by even a dime. It’s the same policy the conservatives in Europe have been advocating, and it’s not working. They are telling us that with the massive reduction in spending comes a huge boost in “confidence” to the private sector that will then produce hiring. They warn of the dangers of inflation and debt that would come with increased spending or emergency aid.

But they are wrong, and we are suffering for it. To get out of major recessions, governments need to increase spending on infrastructure, local services, and unemployment benefits because it puts money in the hands of workers who in turn will stimulate private sector spending while their books recover from a downturn. During all modern U.S. recoveries, we have had a boost in government employment to help compensate for private sector loss. That includes massive public expenditure from Saint Ronald Reagan.  Inflation and spending in the U.S. are increasing at a slower rate than any time in 50 years, and our employment crisis is the worst in a generation. The national tax burden is also at its lowest level since the depression. Without a stronger effort to boost employment, our long term deficits will be impossible to deal with and our economic growth will be so low that we will actually be dealing with deflation in the long term.

So what we should have been doing is providing more aids to states so they could keep teachers, firefighters, and police on the job. We should have been spending even more on our infrastructure and public works. The good news is we elected a president who at least took the first steps to pulling this economy from the brink, and for that, we have had a better recovery than the austerity bent nations in Europe.

Next time you hear Republicans talk about the need to gouge government spending and reinstate trickle-down economics, just know that what they advocate has no historical precedence. It’s not based on math, and it’s certainly not based on working economic practice. Bring that knowledge with you to the polls.

Published in the Spectator

1 Comment

  1. Exactly. For some reason, the Republicans are stuck in supply side economics. They thing giving tax breaks to the employers will stimulate the hiring of more workers.

    But in fact, labor is a demand side driven function of production. No producer in their right mind is going to hire any more workers until he/she has eked out every last bit of production from the ones they already have. The marginal cost of hiring more workers can only be justified when the marginal production they produce has a market.

    How to increase the market demand for more products? Make sure there are more folks working above subsistence level. How to do that? Stimulate the economy any way you can. How to pay for that? Reduce or eliminate the tax credits to the rich that have been chiefly responsible for the lop-sided income disparity in this country.

    Here is where it gets sticky for the extremists who have painted themselves into a corner with “no new taxes” rhetoric. They are, after all, the very people who would see their taxes go up. (And the ignorant poor who believe they too will someday be rich, and so do not want to upset the status quo.)

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