Good Economic Policy

Let's pretend this represents the economy from say, 1980, and into the great beyond. Our economy began the 80s under performing. Then came tax cuts which did not restrain, nor were restrained by, federal spending. You have a sharp period of bullshit economic growth, with the eventual collapse well under the level of growth a healthy economy could provide (the first shaded pink area). For the sake of simplification, let's group the dot-com bubble with Bush tax cuts and the housing bubble (bullshit growth area #2), because there was a fair amount of overlap with very little constriction. Any sort of bubble effect is trying to cheat GDP, so you can assume we've been run by cheaters and liars for the past three decades. I hope that trend is broken this time around, but we'll have to see.

The thick red line is what we've had. Periods of bad economic policy providing unsustainable growth, with resulting collapses which make life suck more than it normally would, which hurts even more because life was sucking less than it should just a few months ago.

The problem today is that the collapse is the worse collapse since the Depression, so there is little doubt that the "life sucks" pink area, again, representing the difference between what we have and what we could have, will be very big, and last for a very long time. The financial sector of the economy is right up there with oil in terms of what keeps the economy growing, and that's why this is huge, and this is why we need to do it right.

Today, we have choices. We can do nothing, and let the red line continue until the economy bottoms out, only to slowly recover. Conservatives are half right when they say that we don't have to do anything, and the economy will recover. Of course the economy would eventually recover, and this has the added benefit of eliminating all of the poorly-run companies. But it would take a very long time to get back to a healthy growth rate, and would maximize the life sucks pink area.

We could just deregulate everything and let everything run its own course. But whenever we choose to do this, bad things happen. Read your goddamn history. The whole reason socialism was popular in the late 19th and into the 20th century was because emerging industrial capitalistic economies were always guided by stupid ass lassiez-faire economic policies, which did bad things to most people, like keep them really poor, without access to stuff they needed. It's not that you can't have outstanding economic growth with no regulation. It's just that you will experience more market failure, people can't afford to buy the shit they need, and they will eventually try to shoot your ass and take the shit from you. I'm not anti-capitalist. I am anti-socialist. And the best way to avoid socialism is to regulate capitalism.

We could simply let the market bottom out, but only reestablish regulation so that it never happens again. This would provide some confidence in the economy, so the growth rate would be faster if we did nothing at all. But, again, the economy would continue to get worse before it got better, and that's a very long time of life sucking for everyone.

The government could just go into debt by giving out tax cuts, without any resulting decrease in federal spending, or extending unemployment benefits. In the short run, this could provide a very small increase in economic growth in the form of consumption. In the medium run, there's a good chance it will shallow out the bottom of the economic free fall. But even if you assume this would stop the economy from bottoming out completely, in the long run the tax cuts would give you no assistance at all in the recovery, when the bills come due. It is still a very long hard road of paying back the tax debt, and life would suck for a very long time.

Better, the government could invest in things that would make commerce easier to conduct. But it could spend money on things like building fiber optic networks, expanding highways and constructing bridges. This is just like you and me buying shit, because it creates jobs. But it's also like you and me invested in something that promotes productivity, which also increase GDP, and has the added benefit of making money easier for everyone, which would allow people and businesses to make more money, driving up consumption and investment and tax revenues. Remember your GDP multipliers. If the government invests in things like renewable energy, we wouldn't have to buy so many fossil fuels from other countries, which would reduce the trade deficit, while still buying shit like consumers and investing like savers. This would still take a long time to get back up to our natural economic growth rate, mostly because there is only many, as Krugman says, "shovel-ready projects." It would put some people back to work very quickly, so there would be a short-term bump in economic growth. But in the medium to long run, as more and more of these projects come on line, our capacity for economic growth would actually be better than if we provided no government investment in capital growth. We would more quickly approach what we're used to, and exceed that quicker than any other single plan on the table.

None of these approaches work quickly enough to save us from having our life suck, though some are better than others. Here's a neat trick: You can stack them. You fund some of the short run stuff to stop the bleeding. You can cushion the economy from the effects of the short run stuff drying out by investing in some of the medium run stuff, like tax breaks. You can immediately start your long run infrastructure projects at the same time, capturing that short run bounce and the long run increase, and you can, and should, reorganize the government to pay closer attention to the markets, regulate where they can, deregulate when they can, and most importantly, make sure we do not stray too far from our natural growth rate.



These are our choices. Yes, the economy is that bad. No, the economy will not be good again for a long time. Yes, life will pretty much suck. No matter what, though, we will recover, and life will improve. The point is, if we get our shit together and establish good economic policy, we can recover much more quickly, and come out of the recession much stronger, than we went into it.

The monetary policy component will have to be a major part of the recovery process, and it's something I don't even want to speculate on, simply because I'm not smart enough. I do know that you can pour trillions of dollars into it and you will never get it back. You can set aside money to back every shitty mortgage, but when we're hemorrhaging a half million jobs a month, who the fuck is going to pay those mortgages? There's no guarantee that the commercial banks are going to start loaning money out again, which is the whole goal of the exercise. You have to create jobs so people can pay their mortgages and escape foreclosure. That's the easiest way to stabilize housing prices. Otherwise you're just transferring bad debt to the government with nothing to show for it.

The housing and monetary crises today belie the fiscal problems. Printing money or taking money out of the economy are band-aids, though seemingly very expensive ones. $700 billion for this is a drop in the bucket. But no matter what we do, we cannot simply print money to make the underlying economic situation better.

Jobs, jobs, jobs and infrastructure to support it. Whatever it takes, is the order of the day.

Let me be clear when I say all of this stuff will have to be handled very adroitly and deftly if they are to work at all. Over-regulate, you stagnate the economy, under-regulate, you create another bubble. Miss the tax break by a few billion, you add debt without doing anything, cut too much, and you're basically creating another bubble. Get hamstrung in trying to create infrastructure projects, you retard economic capacity, making recovery longer, create too much, and you can't afford to maintain it.


How quickly we get it right will determine how much life will suck, and when it will stop sucking. There are other problems looming on the horizon, but we will be in a much worse position to handle them if we dick around with the recovery.

I have to hope things are fixable, and we use some common sense, and not stupid ass politics, to get the stimulus done. We're at the end of the rope in terms of how much too cute by half creative accounting we can tolerate.