The Election and Economic Policy

Those of you who have read this blog since it started will recall that I set out to express my objection to the economic policies of the Bush regime. They were misguided, ill informed, and fiscally reckless. The Bush legacy is the single largest reason for our current Federal deficit. Remember his reasoning? That the Federal surplus he inherited from Clinton was a misuse of the citizen’s tax dollars. The government should not be taking in more than it spent, so he cut taxes to cure the “problem” of a surplus. Boy did he ever. It was a monumental mistake. Instead of using the healthy economy of the late 1990’s to pay down our national debt, we engaged in a gamble of epic proportions. In effect we bet that the economy would never turn down, and that we would not need to use fiscal policy to save ourselves from a recession any time soon.

Whoops.

History will record the Bush tax cuts as one of our most egregious mistakes.

What made it worse was the cynical way in which it all occurred. The Republicans did not have to courage to balance the budget, as was required if the lost revenue was deemed permanent. That would have meant going to the voters with huge cuts in entitlement and defense spending. So they punted. They made the tax cuts temporary. They were designed to expire slap in the middle of the first term of the next president, long after Bush had faded back to his ranch. Can we all admit this was cowardly and cynical?

What’s that to do with the election of 2010?

Because the entire tone of the election is set against the backdrop of the grand clean up of the Bush chaos. The Democrats failed miserably to deal with the collapse of the economy. That collapse happened on the Bush watch, but the clean up only started in full gear after Obama took office. The bank bail out was a Bush policy, getting unemployment under control fell to Obama. Voters are about to lash out at the failure of Washington to react in proper proportion to the problem. The Democrats were divided and timid. The Republicans obstinate and unrepentant. Policy became a tussle between “No” and “Can’t”. Dither and muddle took hold as inequality soared and unemployment stayed stuck at unacceptable levels. Someone has to pay for the malaise. That means whoever is thought to run the place.

So here we are in 2010 with the likelihood of a return to power of the very party whose policies led to the crisis. During the last two years the Republicans have not uttered one policy statement to suggest they have any ideas what to do. They are simply driven by anti-Obama sentiments. A stalemate is almost inevitable. Obama can prevent any further market magic nonsense, but he will have no power to enact any meaningful remedial policy.

This is a recipe for disaster.

The next clear opportunity for strong economic policy action therefore appears to be 2013 in the first year of the nest presidential term. By 2014 we will be electioneering again, and between now and then I predict a stand off.

Since the economy appears to be headed into a prolonged malaise of weak growth and high unemployment, a political gridlock could not come at a worse time. This means that we will have no response to the rapid rise of Chinese economic power; to lingering unemployment; to inadequate growth; to our festering infrastructure issues; to the imbalances inside our entitlement budget; and to our apparent decline as an economic powerhouse. The American economy will remain the world’s largest and most wealthy, but it will also remain sick. That represents a problem not just for us: we will forgo wealth at an alarming rate, but for the world as a whole: the rest will have to put up with our inertia and endless quarreling.

The impoverishing of our middle class that was set in motion by Reagan and which was accelerated by the Bush tax cuts, will thus continue unabated. Inequality will rise further; profits will be robust; we may fall into deflation; the malaise will be prolonged and painful.

We will pay a huge price for the so called anger about to be expressed in this election. Like a petulant child we are about to lash out and make matters worse instead of being responsible and setting things right.

I remember being vilified by conservatives when I argued that Reagan’s budget deficits would damage our future. I was similarly called out for opposing the Bush calamity. Running deficits is just fine as long as GDP grows more quickly than the debt. Indeed permanent deficits are no problem in that case. But the Reagan and Bush deficits that haunt us now were utterly and cynically destructive. They undermined growth and gutted out our economy. If we want to get angry we should at least get angry at the perpetrators of the problem. They are the ones [Cheney] who told us that deficits don’t matter. And they are the ones about to regain control of Congress on the backs of our anger at the mounting debt they created.

There’s something juvenile about that.

I hope I am wrong.