The Sad State of the Economy

We risk losing an entire generation of human advancement due to the mismanagement of our monetary system...

Craig Willms - blogger

I think it's safe to say that people from all walks of life are at a loss to adequately explain the reasons we have such a sustained economic mess. I watch CNBC nearly everyday only to see the talking heads spew one thing one day and another the next. Obviously the political class is too self-serving to actually offer explanations beyond platitudes and sound bites. Liberals offer only higher taxes, higher spending and stifling government control as the answer to everything. And the conservatives? They are currently in scare monger mode when it comes to debt and taxes (and a whole host of social decay issues).

There are some who think government spending is out of control - this is only human nature when we see the terrifying numbers associated with our national debt - believing basically that the Federal government is sucking all the oxygen out of the economy. Others believe that only government spending can spur the economy back into growth. Who's right?

Unemployment is chronically high. State and local governments are (actually) broke. We've seen energy and food costs soar while being told that inflation is not actually happening. We watch our personal wealth circle the drain as the value of our homes and 401k's go south. Why?

Where are the solutions, where is the leadership?

Currently we have people like Rep. Paul Ryan (R-WI) chairman of the House Budget Committee looking to cut billions from future budgets in an apparent austerity movement. We have Fed Chairman Bernanke pumping billions into the Treasury in an effort called QE2 (Quantitative Easing Round 2) in order to keep the government and the banking system flush. We have Democrats and liberals resisting any budget cuts either out of genuine concern for the "disadvantaged" or just to oppose the Republicans.

Are these really solutions?

First, I guess we have to define the problem. For the longest time we heard that companies aren't hiring because of the uncertainty created by the President Obama/Speaker Pelosi agenda. Even I buy this to a certain extent, but it can't be the significant cause of this horrible economic malaise. Productivity is up but the current workforce has not becomes slaves to the job. If it were true then the average number hours worked would have increased since 2007 and they haven't. The current average is 34.1 hours. This is nearly 2 percent lower than the 34.7 average in December of 2007, the month the recession officially began.

The economy is operating far below its potential largely because of a lack of demand caused by a precipitous loss of financial and housing wealth, which obviously results in less consumption. But it's worse than that. The bigger problem is a worldwide lack of demand threatens to push the world into a global depression. The price of oil may be just the straw that breaks the camel's back. Here we have to rely on Saudi Arabia to save us by jacking up their production and thus stifling the speculators who are currently mucking things up.

Of the largest economies only China looks strong right now, but I wonder if China is really just a house of cards. In truth China needs external demand more than anyone. Both Japan (even before the earthquake) and Germany are net exporters who can afford their domestic austerity movements. Is the U.S. actual going to enter a austerity phase too or is the Republican bark much worse than it's bite? And is it wise? I'm just not sure.

Listening to Congressmen declare that America is broke is annoying and it's disingenuous. The Federal government is not broke. However, many of the states are broke because they, unlike the Feds, can't just "print money". Since the U.S. is an issuer of a sovereign currency that's not tied to anything it literally can just create money out of thin air. If the U.S. government was broke the bond raters and the markets would be acting quite differently. Yeah, inflation is a concern, but when aggregate demand is so low inflation is not a factor.

So, yes, there is still faith in the U.S. monetary system, but is it actually possible to have the Federal government spend our way out this? If so why didn't the stimulus package have much of an effect? We all know why - don't we? To say it was poorly managed is an understatement, most political paybacks are poor jobs programs.

Conservatives and old school supply-siders believe that a large cut in federal spending will reduce the government's stranglehold on the economy. I think everyone agrees that the deficits are way too high, but drastically cutting federal spending in the current climate will simply decrease demand, just the opposite of what we need.

There are those who believe Obama didn't go high enough with the stimulus. What's needed now is huge increases in both public and private spending to spur an increase in demand and therefore create jobs. When people have jobs they will want houses...

Honestly, I don't know who is right. Emotion says these outrageous deficits and Federal overreach is beyond frightening, but there is a certain logic to priming the pump. If businesses and private sector can't or won't do it - someone has to, right?


CW

(and yes, I quoted myself, it's my blog)