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What’s To Be Done?

January 8, 2010

Bruce Bartlett’s latest column illustrates how I basically feel about the economy.  Right now, it seems that there are way too many conservatives advocating deficit reduction and hard money at a time when we need what essentially amount to short-term deficits and soft money.  Of course, this doesn’t mean conservatives shouldn’t be against initiatives like the health-care bill that are gateways to huge long-term deficits.  And the stimulus bill was most certainly a gigantic waste of money.  But the stimulus bill wasn’t irresponsible because of what it imposed on the deficit, but rather because of the immense quantities of pork piled on the head of the American taxpayer.

Here’s Bartlett with a little lesson from The Great Depression:

During 1937, Roosevelt pressed ahead with fiscal tightening despite the obvious downturn in economic activity. The budget deficit fell from 5.5% of GDP in 1936 to 2.5% in 1937 and the budget was virtually balanced in fiscal year 1938, with a deficit of just $89 million.

The result was a huge economic setback, with GDP falling and unemployment rising. For this reason, Obama’s economic advisers have been warning for some time that stimulus must be continued until full employment has returned. As Council of Economic Advisers chair Christina Romer wrote in The Economist last June:

“The 1937 episode provides a cautionary tale. The urge to declare victory and get back to normal policy after an economic crisis is strong. That urge needs to be resisted until the economy is again approaching full employment.”

Bartlett then reasonably assumes that there probably won’t be any fiscal tightening because spending is unlikely to be decreased (knowing this Congress) and new taxes will be difficult to enact.  For the country’s benefit, I certainly hope the latter does not happen.  The former, however, could be achieved in a much more efficient manner than spending $645 billion worth of pork.  But that’s not on the table.

Conservatives, along with everybody else, know that inflation sucks.  The 1970s sucked.  Unfortunately, the bigger risk, over a year later, is still deflation.  You can ask the Japanese which is worse.  And, since the President’s Administration has done pretty much nothing to spur growth in the private sector, our only viable means to recovery remains access to easy money.  That’s the only thing that will get the banks lending again (the President’s urging them to lend while damning them for predatory lending certainly won’t do the trick).  We all have to accept that we need to allow our money supply to inflate to get money flowing through the system again.  That’s what we needed a year ago (along with some form of stimulus), and that’s what we still need thanks to the policies that the current government has pursued.

As far as further government stimulation, I’m highly in favor of canceling future stimulus spending in favor of a partial payroll tax cut.  As fuming as some of us may be at the lavish expenditures of our current Congress, the reality is that we cannot afford to tighten our belts right now.  And Congress’s idea of regulating the Fed itself is a really bad idea—it might even serve to promote deficit reduction and hard money as a policy for political gain.  Let’s hope Bernanke & Co. help us out, and let’s hope Ron Paul & Co. leave us alone.

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