Monday, July 16, 2012

The economic fix

I read an article this morning, and I have to say, I've finally found someone that I somewhat agree with when it comes to the current state of the economy, and how the federal government should deal with it.

Let me begin by saying that I don't think there is any really quick fix for the economy.  We are in a situation that has been created over a long period of time, and I think we are looking at a long period of time to correct the situation.

The aforementioned article is actually an interview with Richard Duncan, author of  The New Depression, so my references to what the article states are, of course, statements made by Mr. Duncan.

The article states that the federal government "should borrow "massive" amounts of money at the current low interest rates to invest in new technologies like renewable energy and genetic engineering."  I actually don't understand why the government isn't borrowing more than they are.  Interest rates will likely not be this low again for a long time, so why worry over how much the government is borrowing?  It could be argued that the interest rates on government bonds is effectively zero, or even negative, which is a good thing for the government, if not for the investors.  Without going into specifics, I think the government should go on a huge buying and hiring spree, funded with money borrowed at ridiculously low rates.

I also think the Fed should have their mandate changed.  It has always puzzled me why the Fed should have the dual mandate of controlling inflation and encouraging growth.  The two goals are opposing; in order to increase growth, the Fed would lower interest rates, while controlling inflation requires raising interest rates.  And normally, this results in a situation where the Fed has to make a somewhat subjective judgement over which (inflation or growth) poses the greatest risk to the economy.  So, I propose that the Fed instead have the mandate of controlling the amount of outstanding private sector debt.  Growth and inflation would be the concern of the federal government, as it should be.  After all, we all blame the government when those are bad, and politicians are quick to take credit when those are good; let the government have sole responsibility for them.

The idea that I'm getting at here is to create a situation similar to the situation around the time of World War II.  When the U.S. entered the war, the government started a massive buying program.  Of course, at the time, who would complain?  The Japanese had just destroyed most of our Navy, and we needed to replace those ships.  We "hired" soldiers, and we limited the goods that consumers could buy, either through rationing or through direct control of the use of materials on the part of the government.  At the end of World War II, many economists claimed that we were destined for a huge recession due to the huge decrease in government spending, and the increase in unemployment resulting from the soldiers returning home.  While GDP did, in fact, decrease by approximately 11 percent in 1946, we were entering a period of great prosperity for the U.S., and depending on how you define "recession," it can be argued that there was no recession.  Certainly, all the gloom and doom that economists were forecasting didn't happen.

This same article quotes , "If this credit bubble pops, the depression could be so severe that I don't think our civilization could survive it."  I'm not sure what that is supposed to mean, but I think it sounds a whole lot more dire than what we are facing.  However, I do think that current circumstances, if not somehow controlled, could lead to another global conflict, which in the end would serve the same economic purpose as the actions I am proposing here.  My preference would be to attempt to create similar economic conditions as World War II did, without having to actually have a World War III.

In the end, I actually believe that the economy will work itself out, no matter how badly it is handled by our government.  And I'm sure that whoever the politicians are that happen to be in office at the time that this happens will be more than happy to pat themselves on the back for a job well done.  Unfortunately, I also think it will take a long time for the economy to work itself out, and I think the current actions of the Fed and government will just prolong the pain.

So, in short, and perhaps in oversimplification, the fed should start raising interest rates to deflate the bubble in private sector debt, while the federal government should borrow and increase spending and hiring to lower inflation and maintain aggregate demand while consumers are adjusting to higher interest rates and, at least theoretically, buying less.  Once we have decreased private sector debt to an acceptable level, the government can concern themselves with balancing the budget, paying off its debt, and decreasing the size of government.

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