Saturday, April 28, 2012

What we can learn from comparing the U.S. and European economies

One of the biggest issues of this campaign should be how to grow the economy.  Both candidates will likely speak in small terms, using symbols to send their messages, but it would be nice if they actually went to the heart of the matter and discussed their very different macro views of the role of government and the economy.

At the heart of the Republican view is the idea that the U.S. needs to cut spending and reduce regulations and let the economy grow as a result of the freedom it is given if left to do so by a government that just stays out of the way.   

At the heart of the Democrat view is that the federal government needs to inject stimulus spending into a depressed economy to provide temporary demand that will keep the economy going, and create jobs, so that the economy can recover and start to grow on its own without the extra stimulus from the government.

Of course, the conversation devolves immediately into accusation and demonization because the hard right sees government spending and regulation as attempts by the intelligentsia to take over the country with massive socialist endeavors that empower themselves and steal power from the entrepreneurs and business. 

And, of course, the hard left devolves just as quickly into accusation and demonization because it sees cutting spending and reducing regulation as nothing more than ideological cover for heartless exploitation and greed of the few (the 1%) at the expense of the many (the 99%).

Interestingly, Fareed Zakaria on his Global Public Square show last Sunday tried to inject some objective data into the debate.  His point is that these two approaches are currently being tried: one in Europe and one in the U.S.

In Europe, the austerity approach is being tried, and the results are terrible.  Governments are cutting spending, rather draconianly, in Brittain, Greece, etc.  The results are the tiny growth of about 0.8% for the EU, with the economies most subject to austerity actually shrinking.  Why? because austerity shrinks the economy and lays off people, reducing demand, which ends up with not only a worsening economy but also an ever increasing deficit.  It doesn't look like austerity is working in Europe, and there is no reason to think it will work in the U.S., other than to those whose secular religion is the ideology of tax cutting, spending cutting, and austerity.

In the U.S. the stimulus approach was tried, and the results are moderately good.  The growth rate is about 2.2%, not as good as we would like, but quite a bit better than those countries following the austerity mantras of the Right. Of course, Republican outrage has stopped any future Keynesian stimulus, but  I think that Obama and the Democrats are correct when they say that it has helped.  Plus, I firmly believe that much stronger regulation of the financial industries is necessary because Wall Street has proven to me that they cannot be trusted to run their businesses in any way other than to take ever greater risks to make huge personal fortunes, while they know that the federal government will absorb their losses and keep them from failing, and will keep them out of jail if they do.

So, I am in the process of changing my mind.  Up to now I have thought it was obvious that with our huge deficits and debt we needed to both cut spending and raise taxes.  I still think that is largely true, but I am thinking that the spending cuts can be moderate and should focus largely on the military superstructure as well as entitlement reform, the tax raising is best in the form of a major tax reform that takes away the government giveaways to interest groups, and active government stimulus and regulation are vital to the creation of a newly robust economy.  

So, raise taxes, increase regulation, Keynesian stimulus spending, and spending reform (entitlement and military cuts leaving room for infrastructure, education, and research support) - the four pillars of economic growth.  My new mantra.  So far.