Monday, November 4, 2013

How we got here and the way out

"We have a government that hasn’t been able to agree on a budget in five years; that has historically, under both Republican and Democrat presidents and Congresses, spent money and committed itself to fund long-term programs without devising revenue streams to cover current costs or fund future liabilities."  -- Richard Fisher, President of the Federal Reserve Bank of Dallas

That is most certainly the crux of the matter, and here is the rest: It is simply true that the contraction of government spending in the near term contracts the economy, broadly impacting employment and income and living standards. Fiscal stimulus would be more effective than monetary stimulus because monetary stimulus has a way of being bottled up in the financial markets feeding speculation and tending to further enrich the already wealthy without creating any new production or employment. Fiscal stimulus, especially spending on infrastructure, directly creates jobs in the domestic economy while the infrastructure improvements themselves, even allowing for some waste, improve economic prospects going forward. The big problem with fiscal stimulus is the already high level of government debt. Financing fiscal stimulus with even more debt poses risks perhaps even worse than the "uncomfortable spillover effects" of continued extreme monetary stimulus that very properly concern Mr. Fisher. By not wanting to seem alarmist, he and other officials are likely understating their concerns in public. Where this leaves us, in my view, is that we need fiscal stimulus but it should be paid for with taxes, not debt. My recommendation is for a financial transaction tax that in effect mainly taxes unproductive speculation. As for the gross size of the government and its financial burden by way of either debt or taxes, the best single way to reduce it is to face the fact that operating a global empire is just too costly. It isn't just the military spending. Many of our trade policies are economically disadvantageous to us because they are designed to buy political alliance. And, yes, we need some kind of welfare reform, but if we are smart about it, it need not be cruel or draconian. Much can be done to reduce costs of medical care through simplification rather than increasing them through complexity the way I think Obamacare does.

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