With the hype surrounding the political conventions, the dominant question is, "Which candidate can best 'fix' the economy?" A more realistic question is, "What is possible for either candidate to improve the economy?"
The quick answer to the latter is "not very much in the short run," even if political gridlock would go away, which it won't. The reason why there is no quick fix is that there are multiple causes for stagnation that were decades in the making. They are systemic, and cannot be rapidly "fixed" by a president, even if he had serious cooperation of the Congress.
While there is no quick fix, the economy could rapidly resume a downward spiral with ill-advised measures. The best we can hope for is: first, avoid self-imposed disasters like the fiscal cliff that prevents spending of monies already authorized by the Congress. Second, institute some measures to get us through the short run. Third, and most difficult, correct the systemic problems listed below that are the cause of stagnation.
The trigger that set off the Great Recession was the bursting of the real estate bubble, and with it, lost household and business wealth, collapse of large financial institutions, and potential collapse of many more that would have taken down the entire U.S. and even the world economy. Only the combined efforts of Bush, Obama, and responsible legislatures that "bailed out" these huge financial institutions avoided total economic collapse. Sometimes political decisions are limited to the politically unpalatable and the disastrous.
The fallout from the punctured real estate bubble included lost wealth, unemployment, and lost income, most devastatingly of the middle class. It reduced public sector revenue, putting further pressure on state and local government, and increased the federal deficit, thereby making it more politically difficult to use the tools of fiscal policy to stabilize the economy.
Pundits assert that the real estate market is key to long-term economic recovery. They are only partly right because the multiple causes of the Great Recession were decades in the making and cannot easily be undone by either future president.
For starters, one has to look to cause of the real estate bubble. While individuals can be criticized for spending beyond their means, it was deregulation of our financial institutions, including repeal of Glass-Stegall that enabled - even encouraged - inflation in the real estate market. Deregulation further encouraged formation of derivatives and other complex financial instruments that few people understood - a house of cards that collapsed and threatened to take financial institutions with it.
The "bailouts" were unpopular. In a rational world, Republicans and Democrats would cooperate to take preventive measures so it wouldn't happen again. Regulation doesn't work? It worked from the 1940s until the 1980s when a culture of deregulation took over.
The financial world changed over those decades. But it's not "too much government" that caused banks to fail. It's because there was no political will to keep regulations current with these changes. Warning signs of the Saving and Loan scandals of the '80s and the Long Term Capital Management scam in the '90s rescued by Alan Greenspan were ignored. Yet, even modest (and probably inadequate) proposals of the Dodd-Frank legislation are resisted by the very politicians who rail against "bailouts."
A major impediment to economic recovery is the permanent loss of well-paid manufacturing jobs - outsourcing and off-shoring. Apologists, such as New York Times columnist Tom Friedman, assert that this is inevitable as "the (economic) world is flat." He is only partly right. Yes, capital is more mobile today, and changing technology eliminates some jobs and requires technical education for nearly any job. However, American policy has enabled and encouraged loss of American manufacturing jobs faster than need have occurred.
Specifically, our international trade pacts should be much tougher, insisting that labor of our trading partners be paid higher and subject to improved working conditions. International trade should benefit all parties, reducing costs and improving lives of all concerned - rather than engaging American labor in a race to the bottom.
A major tenet of economics is that increased labor productivity enables, and is necessary, for increased real wages. Yes, increased productivity cuts costs. But over the last several decades, gains from increased labor productivity have gone exclusively to the managerial class. The ratio of CEO pay of our 350 largest corporations to the average private sector worker has over several decades risen from around 70-1 to more than 230-1, and is still rising.
All of the above, the fallout from the Great Recession, financial deregulation, and faulty trade policies, have contributed to an increasingly unequal distribution of income. Individuals can argue over what's fair, just, and equitable. But the pragmatic economic case is that national economies always do better when gains from a healthy economy are realized across the entire income spectrum.
It is not a matter of "taking from the rich and 'giving' to the middle class and the poor." It is a matter of public policy to ensure that economic gains accrue across the income spectrum.
In summary, the drag on the economy is not inability to produce, lack of supply, or excessive taxation. It is deficient aggregate demand - loss of income and wealth, particularly of the middle class, and resultant deficient spending power to give business the incentive to hire.
In the short run, government can augment demand. But large federal deficits, more result than cause of economic stagnation, make this politically unpalatable.
And the long run? The problems outlined above have to be addressed, a politically formidable task. That's why neither presidential candidate can possibly have a quick fix for this economy.
What about the Fed? The current expansionary monetary policy is the right policy during recession. But it's like pushing string. That's where "demand" comes in. The Fed can't create that.
That's a story for another day.
- John Waelti's column appears every Friday in the Times. He can be reached at jjwaelti1@tds.net.
The quick answer to the latter is "not very much in the short run," even if political gridlock would go away, which it won't. The reason why there is no quick fix is that there are multiple causes for stagnation that were decades in the making. They are systemic, and cannot be rapidly "fixed" by a president, even if he had serious cooperation of the Congress.
While there is no quick fix, the economy could rapidly resume a downward spiral with ill-advised measures. The best we can hope for is: first, avoid self-imposed disasters like the fiscal cliff that prevents spending of monies already authorized by the Congress. Second, institute some measures to get us through the short run. Third, and most difficult, correct the systemic problems listed below that are the cause of stagnation.
The trigger that set off the Great Recession was the bursting of the real estate bubble, and with it, lost household and business wealth, collapse of large financial institutions, and potential collapse of many more that would have taken down the entire U.S. and even the world economy. Only the combined efforts of Bush, Obama, and responsible legislatures that "bailed out" these huge financial institutions avoided total economic collapse. Sometimes political decisions are limited to the politically unpalatable and the disastrous.
The fallout from the punctured real estate bubble included lost wealth, unemployment, and lost income, most devastatingly of the middle class. It reduced public sector revenue, putting further pressure on state and local government, and increased the federal deficit, thereby making it more politically difficult to use the tools of fiscal policy to stabilize the economy.
Pundits assert that the real estate market is key to long-term economic recovery. They are only partly right because the multiple causes of the Great Recession were decades in the making and cannot easily be undone by either future president.
For starters, one has to look to cause of the real estate bubble. While individuals can be criticized for spending beyond their means, it was deregulation of our financial institutions, including repeal of Glass-Stegall that enabled - even encouraged - inflation in the real estate market. Deregulation further encouraged formation of derivatives and other complex financial instruments that few people understood - a house of cards that collapsed and threatened to take financial institutions with it.
The "bailouts" were unpopular. In a rational world, Republicans and Democrats would cooperate to take preventive measures so it wouldn't happen again. Regulation doesn't work? It worked from the 1940s until the 1980s when a culture of deregulation took over.
The financial world changed over those decades. But it's not "too much government" that caused banks to fail. It's because there was no political will to keep regulations current with these changes. Warning signs of the Saving and Loan scandals of the '80s and the Long Term Capital Management scam in the '90s rescued by Alan Greenspan were ignored. Yet, even modest (and probably inadequate) proposals of the Dodd-Frank legislation are resisted by the very politicians who rail against "bailouts."
A major impediment to economic recovery is the permanent loss of well-paid manufacturing jobs - outsourcing and off-shoring. Apologists, such as New York Times columnist Tom Friedman, assert that this is inevitable as "the (economic) world is flat." He is only partly right. Yes, capital is more mobile today, and changing technology eliminates some jobs and requires technical education for nearly any job. However, American policy has enabled and encouraged loss of American manufacturing jobs faster than need have occurred.
Specifically, our international trade pacts should be much tougher, insisting that labor of our trading partners be paid higher and subject to improved working conditions. International trade should benefit all parties, reducing costs and improving lives of all concerned - rather than engaging American labor in a race to the bottom.
A major tenet of economics is that increased labor productivity enables, and is necessary, for increased real wages. Yes, increased productivity cuts costs. But over the last several decades, gains from increased labor productivity have gone exclusively to the managerial class. The ratio of CEO pay of our 350 largest corporations to the average private sector worker has over several decades risen from around 70-1 to more than 230-1, and is still rising.
All of the above, the fallout from the Great Recession, financial deregulation, and faulty trade policies, have contributed to an increasingly unequal distribution of income. Individuals can argue over what's fair, just, and equitable. But the pragmatic economic case is that national economies always do better when gains from a healthy economy are realized across the entire income spectrum.
It is not a matter of "taking from the rich and 'giving' to the middle class and the poor." It is a matter of public policy to ensure that economic gains accrue across the income spectrum.
In summary, the drag on the economy is not inability to produce, lack of supply, or excessive taxation. It is deficient aggregate demand - loss of income and wealth, particularly of the middle class, and resultant deficient spending power to give business the incentive to hire.
In the short run, government can augment demand. But large federal deficits, more result than cause of economic stagnation, make this politically unpalatable.
And the long run? The problems outlined above have to be addressed, a politically formidable task. That's why neither presidential candidate can possibly have a quick fix for this economy.
What about the Fed? The current expansionary monetary policy is the right policy during recession. But it's like pushing string. That's where "demand" comes in. The Fed can't create that.
That's a story for another day.
- John Waelti's column appears every Friday in the Times. He can be reached at jjwaelti1@tds.net.
