Understanding Economics

Here is a bit from an article by Brad DeLong in The Week:

Yes, the collapse of the housing boom and the consequent $8 trillion reduction in household wealth does mean that consumer spending will be significantly below trend for quite a while to come. But when the consumer stops spending and sits down, the government and the exporter — and also the capacity-building business — can stand up: There is no chain of logical necessity leading from the collapse of the housing boom to a prolonged period of very high unemployment.

...

What, then, is our immediate problem?

It is political.

The Federal Reserve would rather let unemployment remain above 8 percent for a good long while than run the slightest risk of higher inflation. The Treasury would rather let unemployment remain above 8 percent for a good long while than say that a strong dollar is not in America's interest (even though it is not). The Republican decision-makers in Congress would rather let unemployment remain above 8 percent for a good long while than let Obama win legislative victories.

Most puzzling, the Obama administration would rather let unemployment remain above 8 percent for a good long while than make what it thinks is likely to be an unsuccessful push that will reveal its lack of control over the government. Perhaps they are right that they have pushed the envelope as far as they can go with respect to Congressional action (although not as far as they could have with quantitative easing, loan guarantees or mortgage restructuring via the Treasury). But until you push, you do not really know. And back in the late 1940s Harry Truman welcomed the opportunity to run against the Republican Congress to say that these were the policies he advocated, and he was sorry that the do-nothing Congress would not pass them. The Obama administration seems to feel differently. It's as if they dare not strip off the mask of competence and control to show the conflicted face beneath.

The current jockeying on competing budgets is yet additional proof of our political dysfunction. Our urgent problem right now is 9 percent unemployment. We need investment to speed productivity and income growth — and we need it soon. In the long run, we need to control health care program costs.

A game of budget chicken does not bring us closer to achieving these goals.

Sadly, a kind of madness has seized US politics. As DeLong points out, it doesn't help the average worker. It will mean longer unemployment and a slower economic recovery. But the forces driving this are political so they are beyond the reach of individuals. Only through organized groups can the electorate hope to push back against the madness. They need political parties that understand the dynamics and have platforms that attack the problem at the root. Sadly, that doesn't appear to be the case. Obama is not leading the nation effectively.

You can look at this graph and easily diagnose the ills of the deficit and debt:


The problem is the growth in spending on the military and on Medicare and Medicaid.

The only way that you get more revenue to pay for higher costs is by:

• Put more workers to work so you can collect more income taxes.


• Train workers for higher paying jobs so that they will be taxed at a higher level.


• Raise the tax rate to collect a bigger portion of worker income as taxes.

There is no "budget crisis" in the US. There is a political crisis because there are politicians unable to look at the above list and decide just how much of each they want to use as the technique to make the deficits disappear and reduce the debt.