On the Horns of a Dilemma

The problem with the US is that it has two political parties that have taken two different approaches to the Lesser Depression: stimulus vs. austerity. But as Dani Roderick points out in the following article in Project Syndicate the solution is a merge of the two via a one-two punch requiring politicians to commit to a medium-to-long term solution. Something they just can't do:

Greedy banks, bad economic ideas, incompetent politicians: there is no shortage of culprits for the economic crisis in which rich countries are engulfed. But there is also something more fundamental at play, a flaw that lies deeper than the responsibility of individual decision-makers. Democracies are notoriously bad at producing credible bargains that require political commitments over the medium term. In both the United States and Europe, the costs of this constraint on policy has amplified the crisis – and obscured the way out.

Consider the US, where politicians are debating how to prevent a double-dip recession, reactivate the economy, and bring down an unemployment rate that seems stuck above 9%. Everyone agrees that the country’s public debt is too high and needs to be reduced over the longer term.

While there is no quick fix to these problems, the fiscal-policy imperative is clear. The US economy needs a second round of fiscal stimulus in the short term to make up for low private demand, together with a credible long-term fiscal-consolidation program.

As sensible as this two-pronged approach – spend now, cut later – may be, it is made virtually impossible by the absence of any mechanism whereby President Barack Obama can credibly commit himself or future administrations to fiscal tightening.

Sadly sensible policies are not an option. In the US it requires heroic stands against the intransigence of "the other" to be politically successful. I believe the Democrats are willing to commit to the one-two punch, but they are stymied by the Republican insistence that austerity be achieved on the backs of the bottom 90%. That is just plain unfair. The rich have made out like bandits since the "trickle down economics" of Reagan in 1980. It is time for the rich to be taken by the heels and shaken until all the loose billions fall out and they be employed in saving the economy.

Rodrik ends with a condemnation of the politicians:

Politics, it is said, is the art of the possible. But possibilities are shaped by our decisions as much as they are by our circumstances. As matters currently stand, when future generations place our leaders in historical perspective, they will most likely reproach them, above all, for their lack of institutional imagination.