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How to fix the economy

Last month Tim Bray reminded me that I should be reading The Economist. The thing I like best about The Economist as a publication is that its editorial stance is to be uniformly in favor of global economic growth. While I am certainly much more left wing than their usual reader or their editors, I am essentially in agreement with them that the number one priority of economic policy must be continued, long-term economic growth, even if I disagree with them on other priorities or occasionally on the best approach to creating sustainable growth.

In any case, whether or not you agree with The Economist on anything, they are the best advocates out there for center-right, pro-business policy. Even if you disagree with their conclusions, their arguments are worth grappling with.

Their policy prescription for dealing with the current jobs crisis and economic slowdown is straightforward — Western governments should pursue policies that prop up demand encourage job growth now and make binding commitments to address structural deficits later. This should sound familiar, because this has been the Obama administration’s position since President Obama took office. It’s also the position of nearly all economists who are not partisan hacks. And the truth is that if President Obama resigned tomorrow and House Speaker John Boehner took over, it would probably be his policy as well.

Unfortunately, despite the fact that this policy course is stunningly obvious, the odds are that a gut-level impulse toward austerity, a misplaced fear of short-term inflation, and pursuit of partisan advantage are all conspiring to render not just the US government, but governments all over Europe, impotent in the face of this crisis. And as The Economist points out, an economic crisis is also a human crisis:

… the human cost of the economic crisis is paid largely by those who are out of work, for joblessness increases depression, divorce, substance abuse and pretty much everything that can go wrong in a life. Worse, today’s joblessness is a particularly dangerous sort. A disproportionate share of those out of work are young, and youth unemployment leaves more scars, in terms of lower future wages and greater likelihood of future unemployment (see article). Joblessness is also becoming more chronic. In America, famous for its flexible labour market, the average jobless spell now lasts 40 weeks, up from 17 in 2007. In Italy half of those without work have been so for more than a year. Long-term unemployment is harder to cure, as people’s skills atrophy and they become detached from the workforce. Its shadow lingers, reducing future growth rates, damaging public finances and straining social order for years to come.

People are looking to Belgium with envy because their lack of a government prevents them from pursuing pro-cyclical austerity measures that deepen the crisis. I thought that multinational organizations like the OECD and the G-20 were created in order to facilitate coordinated responses to global crises like the one we’re facing right now. Instead we’re seeing little collective action to turn the global economy around, and very little on the policy front from individual countries as well. In the meantime, things continue to slide downhill.

4 Comments

  1. This post reminds me of this post on the size of the economy.

    When you look at the US economy over the past decade, almost all the growth is debt financed (primarily mortgage debt in the mid 2000’s and government debt since 2007). At some point we are going to wake up and realize that more debt is the problem, not the answer. Hopefully, we’ll do that before the debt markets cut us off as they have in Greece.

  2. It’s unlikely that debt markets will cut off the US.

    The US continues to be the the least risky ship as the international risk tide is rising.

  3. I’ve definitely thought about that original post asking of the economy was just too big and that shrinkage was necessary. I think that it’s obvious that more debt is not the answer for the long term, but I disagree when it comes to the short term. Should the economy just be this size? I don’t think so. We have millions of people whose productive capacity is going unused (or underused) and there are people all over who want more/newer/better stuff or more services. The question is how we create conditions that unlock the productive capacity of more people to fulfill the wants and needs of other people. It would be one thing if the economy were operating at peak efficiency, but it hardly is.

    Who’s going to look at the economy as a whole and address this gross inefficiency. If the government doesn’t, nobody will.

  4. Rafe, regardless of what Keynes says I don’t think that government should function as a replacement for private demand and instead function in a roll that encourages private demand. Just as with the first stimulus, I feel that too much of this money will either prop up states (who can’t afford what they’ve got, be that infrastructure or employees) or will go to temporary measures that do little to fix the structural problems with our economy. I’d much rather see the government work towards making it easier to run a business (less complicated tax code, less onerous regulations, etc) and towards making sure markets are free and fair (less crony capitalism)…but that’s just me. Of course the entire problem with what I want is it’s not what either party wants.

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