Sunday, March 8, 2009

The Daily Strike-3/8/09-The Worst Idea Ever

Happy Sunday and welcome to the Daily Strike.

THE WORST IDEA EVER: Today's theme is the Congressional Republicans ridiculous new idea that the government needs to enact a spending freeze. This idea is the cornerstone of the House Republicans' alternative budget. Even conservative columnist David Brooks called this idea "insane" on ABC News' "This Week." I'm sure a lot of you, in your day-to-day life, hear or see things that "sound good," but when you really think about it, aren't good at all. For example, the adage "life isn't fair" may seem like an easy way to shut up a child, but it's usually a throw-away line for someone who is doing something that is, in fact, unfair. This applies to the absurd talk, propagated in recent days by both Republicans and moderate Democrats that "American citizens are tightening their belts when it comes to spending, so Congress should as well." That's like saying "that guy has had to cut down on his medicine because he can't afford it, so the hospital should, in solidarity, stop spending on medicine as well."

The problem with the economy, in the understanding of a meager Econ minor like myself, is that credit has dried up, people can't get a hold of money to save and invest, and therefore there is a huge lull in consumer demand. Actual output will most likely fall short of potential output by almost $2 trillion. All of the government's actions in last few months has been to reignite demand. With the bank bailout bill, the government was trying add liquidity to the market, so that money was available for people to spend. The stimulus bill, with targeted tax cuts and jobs creation programs, was designed to put money in people's pockets to increase economic activity. Even the conservative answer to recessions, massive tax cuts geared towards the wealthy, are an effort by the government to spur economic activity by putting money in people's pockets. Day 1 of Economics 101 teaches you that during a recession, you use fiscal policy (either tax cuts or government spending) to increase aggregate demand. The only potential concern down the line would be inflation, which is clearly not a problem in the short-run. (even if it may be in the long-run)

So what in the world would be the logic behind DECREASING government spending (i.e. not letting it keep up with inflation)? For one, they want to act like their hero, Ronald Reagan. The problem with that logic is twofold. One, Reagan's initial economic program was in reaction to stagflation. In other words, the government was dealing simultaneously with high inflation and unemployment. It was slightly more understandable to try and decrease government spending to help control inflation. Second, Reagan not only raised taxes early in his term (which conservatives objected to at the time), but he also ran up huge deficits with massive government spending (even if it was mostly defense spending). So their entire characterization of Reagan's policies are misguided.

The only answer I have for this proposal is that they are being blinded by pure ideology. Because it sounds good to have the government "tighten its belt," they might as well pass it off for a plan. The bottom line is that every potential dollar not spent is a dollar that could have been used to increase economic activity, and promote economic growth. Families and businesses can't spend dollars they don't have, but government can. That's one of the reasons we have a government. It can create demand where individuals and businesses can not. There are legitimate arguments to be had as to how to spend the money. I would argue that we should give it to people who are most likely to spend it immediately, namely the poor and the middle class. The best way to do that, in my view, is to create jobs through government investment in clean energy, infrastructure etc. It also helps to extend unemployment benefits and food stamps so that people who have been left behind by the economy can still have some spending money. More conservative economists might argue for more tax cuts and targeted spending on infrastructure, unemployment benefits etc. But no serious economist would call for a spending freeze during a recession.

SUNDAY TALK SHOWS: Not much else happened today in the world of politics. There were a few interesting tidbits on the Sunday Talk Show. White House Budget Director Peter Orsazg dismissed the spending freeze idea by quoting Ronald Reagan's famous debate quip: "There you go again."

Richard Shelby, Republican Senator from Alabama, seemed to express little concern that Citibank might fail. Shelby is the ranking member on the Senate banking committee. So any decreases in the stock market for next few days we can all blame on him.

Also, Senator McCaskill admitted that the Democrats currently don't have enough votes to pass the Employee Free Choice Act, a bill that would make it easier for workers to join a union. Obama will need to engage in a major campaign to drum up support for the measure if it is to have any chance at succeeding. Once he begins to solve the immediate economic problems, he can focus on how we can create long-term change.

That's pretty much it for today. See you tomorrow for the Weekly Strike.

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