GOP Wanting Less Regulation is Like Crooks Wanting Fewer Cops

Time for the truth; Republicans’ long-held mantra of less regulation is like crooks wanting fewer cops. Duh! I mean come on! I have de-bunked ever single theory, implication & assertion, and plugged every nook and cranny from which this crock of bat-crap crazy reasoning has oozed from the GOP since Ronald Reagan.

BARACK OBAMA will officially be a two-term president, and the world breathes a collective sigh of relief (in a BBC World Service Opinion Poll of 21,797 citizens of 21 countries, only Pakistan favored Mr. Romney). Not that Americans care, but even if he achieves a  smattering of legislative goals during his second term, his re-election protected the major achievements of his first term.

And the achievements are nothing to be sneezed at.  His re-election guarantees that health-care reform will be fully implemented and become part of the framework of the country’s safety net. If the potential for new initiatives looks a bit limited, President Obama must be at least relieved that his second term will start under better conditions than the first.

Comparing and Contrasting

In November of 2008, when the president was cementing his victory over John McCain, the  economy lost over 800,000 jobs. Employment is now growing and has been, albeit slowly, for over two years. The following conditions are also positive:

  • Banks are lending again
  • Households have reduced overall debt and are poised for unleashing some pent-up demand
  • Home prices have stabilized and begun rising
  • State and local governments are presumably by and large done with slashing budgets and payrolls to close revenue gaps.

The hardest part of the post-crisis period at least appears to have passed. Some analysts project that a semi-robust recovery could finally emerge. President Obama could very well preside over the next four years with a strong economic tail wind, but President Obama should be wary of economic complacency, and more importantly, seek sound economic advice. The economy is a long way from being out of the woods. And he  desperately needs sound economic policies, not political expediency, if he hopes to make a sustainable, lengthy stab at repairing a broken political system as well as a fractured foundation under the economy.

The Federal Reserve is Out of Ammunition

The primary obstacle, at least regarding macroeconomic monetary policy, is that there is no wiggle room left with the liquidity rate because it’s already at the zero mark, so The Federal Reserve Bank can no longer cut interest rates targets for inter-bank transactions to buoy the economy. The Fed has also used the unconventional policy of quantitative easing (buying financial assets from commercial banks and other private institutions) to provide stimulus despite the liquidity handicap. However, Chairman Bernanke is clearly less comfortable using forward guidance and asset purchases than the conventional method of changing the federal funds rate target. The bar to action is higher, the costs are greater, and the accommodation of a cyclical (and normal) economic weakness is less comprehensive.

This same restriction is responsible for some of the weakness of the  recovery. It also suggests that the multiplier on government spending is likely to be higher than customary,( a 1% reduction in government spending might well translate into at least a 1% reduction in GDP, and more likely as much as 1 and 1/2%). Even worse, it means that the U.S. could be in serious trouble if it falls back into recession. There is a risk that it will be stuck at the zero interest level for an extended period, in exactly the same way that Japan has been low-interest bound for a dozen years.

To avoid Japan’s dilemma, the U.S. economy needs to grow fast enough and for a long enough period to force less significant interest rates up(i.e. auto loans, credit cards, mortgages). Moreover, it needs to do so soon enough and systematically enough to give the central bank room to cut rates effectively in response to the next recession (yes, there will always be a “next one”) without reducing them all the way back to zero.

So, the economy is looking healthier, but it hardly seems to be on the threshold of sustained, or moderately increasing growth, that is adequate to achieve a truly beneficial rise in rates without having to achieve it too quickly.

This Is the Part Conservatives Just Don’t Understand

This dynamic makes the ominous and predictable turn toward drastic deficit reduction particularly loaded with dangerous and destructive side effects.

Reducing the deficit in order to stabilize the country’s total debt load is a worthy objective. But in the short run, it is as risky, if not more so, than the actual effect of the debt load itself.

Why? Because the global economy remains shaky. Many of U.S.’s largest trading partners are trying to raise their own net exports. External demand will be providing little or no help to the U.S. economy in the near future. The UK, and to a much larger extent, the Euro zone is struggling to simply maintain any semblance of stabilization in their economies, and in many cases are contracting. At least the U.S. has managed to achieve slow but steady growth despite a stalemated Congress along political ideologies rather than considering sound macro-economic policies. The GOP in particular, seems blindly convinced that business and individual economic methodology (micro-economic) is applicable to governmental (macro-economic) economic methodology. Well, I’m sorry, but as any college freshman Economics major should be able to tell you, that kind of thinking is akin to dodging a bullet by jumping into quicksand.

Deficit reduction must be handled very carefully. Ideally, the pace of consolidation would be gradual and not tied to political cycles. An immediate 4%-of-GDP shift in a fiscal positioning is almost certainly doomed to an ugly and protracted failure. You only have to look to the UK and the Euro zone to witness what ill-timed, and badly-paced deficit-reduction will do to stagnant or minimal-growth economies. It crushes them.

Ideally, deficit-reduction strategies in economic downturns focus heavily on:

  1. Reducing the rate of growth of the  long-term drivers of spending (especially health care, but also defense)
  2. Paying careful attention to relative multipliers in order to improve the overall growth effect of the cuts
  3. A policy package that raised high-income tax rates ( producing $700 billion in revenue over ten years), and invested in needed infrastructure (that would spend $500 billion over ten years).

#3 alone would reduce projected ten-year deficits while possibly having a net positive impact on short-run growth.

Better yet, implementing a minimal, but dedicated revenue source, to supplement the reduction of the long-term debt would provide a still-more aggressive debt reduction strategy(see:The One Penny Solution- Financial Transaction Tax) as long as it could never be used for new spending as the One Penny Solution specifies.

Together with a monetary stimulus, badly needed tax-code reform, and  immigration policy reform that would make it much easier for people to move to the U.S., the Federal Reserve Board could more definitively and in a controlled environment, begin to rectify the zero-interest rate conundrum.

The trouble is that deficit-reduction in the U.S is never based on economic ideals. They are inevitably based on political expediency.

This Had to End Up Referencing the Fiscal Cliff

Which, of course, leads to the sinister Fiscal Cliff. If the only way to protect the U.S. economy against a massive dose of cuts in “non-defense discretionary spending” is to make sure that high multiplier items (i.e. military) feel the burn as well, then the most logical way forward is to make the spending cuts universal.  The resulting shock to the system would not really be a cliff, but more of a slope; and it  would NOT be tailored to minimize the damage to the U.S. economy, but it is the most politically expedient way for President Obama to force the stubbornly-obstructionist GOP to the bargaining table in an attempt to avoid serious and long-term economic damage.

Again, “damage” may not interpret, at least in the short-term, as anything prohibitively serious. If some spending falls and growth slows in the first half of 2013 but stays positive, one could argue that the U.S. economy dodged another bullet. But it would have done so by prolonging the period over which the economy remains stuck at the zero inter-bank rate, in effect by dodging a bullet by jumping sideways into quicksand.

The American economy is healthier (relatively speaking) in a half-dozen years, but it remains extremely susceptible to external and internal exposure. President Obama must be wary not to take the strengthening recovery for granted, or a part of his historical legacy will be a failure to steer the U.S. economy out of the hazardous badlands of an economy with no wiggle room with its monetary policy; only its fiscal policy.

Is it fair to place the culpability for this on President Obama? Probably not. He has played a bad hand that was dealt to him admirably. It can also be sid, truthfully, that President Obama was dealt a much poorer hand than he was led to believe, and has performed as well as expected.Dd eIt is certainly within the Fed’s power to plot a course for the economy away from the zero interest sand trap.

The Fed could take an easier way out and promise to temporarily target a higher rate of inflation; maybe 3% or 4%, which would return the economy close to the pre-crisis trend in nominal output and increase GDP almost immediately.

Of course the GOP would scream bloody murder and Ron Paul supporters (along with various pseudo-Libertarians)would be back to the economically suicidal shrieks of “GOLD STANDARD!!!”, or Austrian Economics of all things.

But given that the Fed is reacting less to economic weakness than it might if rates weren’t stuck near zero, President Obama must step very carefully in managing economic and fiscal issues and back away from the ex-Wall. Streeters that have held sway over his economic policies for four years too long…but for reasons of political expediency, not macro-economic best practices.

Harvey Gold

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