I quit teaching political science 28 years ago this week, and I’ve happily managed to avoid the subject for most of the ensuing period. However, in a not-so-encouraging sign of the times, over the last couple of months, I’ve been doing a lot of thinking about politics and politicians, and what they can and should do to influence the economy. One conclusion I’ve reached is that governments, like many of us, only make unpleasant decisions when a pending crisis leaves them no choice. The ongoing Greek debt debacle and the apparent stalemate over the U.S. debt ceiling are two cases in point.
I can’t claim to be the only one who looked at Greece’s fiscal revelations in spring 2010 and concluded that it would never be able to repay its debt as currently structured. Once we found out that the Greek emperor was dressed only for the country’s famed nude beaches, we also discovered that other countries around Europe’s periphery were similarly attired. Although we could face one small country’s sovereign debt default, once the Irish, Portuguese, Spanish, and Italian dominoes lined up, the specter of 2008 rose again. That’s a crisis.
According to the Greek finance minister, the country will impose a series of budget cuts, tax increases and public asset sales “regardless of the political cost” in hopes of shrinking the deficit. Unfortunately, the austerity measures already implemented during the past year have left Greece with higher unemployment, a weaker economy and lower government revenues. In my opinion, last year’s austerity measures were never thought of as a true fiscal solution. Rather, I believe they were simply “the pound of flesh” that European authorities and Greece’s creditors demanded before assuming the political and economic risks of putting up cash to prevent an immediate default and eventually accepting less than the full and timely repayment of Greece’s outstanding bonds.
While Greece cannot sell bonds in the open market, the U.S. can still issue 10-year Treasuries at near 3%. However, even though the markets are still purchasing U.S. government debt, congressional Republicans have threatened not to raise the debt ceiling and, in doing so, I believe have created a debt crisis from what has always been a routine matter. Indeed, things have gotten so serious that the U.S. Senate will work over the holiday weekend (imagine that)! However, I’m certain our representatives will find a face-saving way to avoid a default on our government’s debt. Insofar as tough economic issues finally being on the table, I believe budgetary politics have changed for the better.
I’ll have more to say about the debt ceiling debate as it proceeds, but for now, let’s just say it’s preferable to have a political crisis before we have a financial one.
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Jerry,
I just read your June, 2011 article “Politics and Policy (Will the U.S. Default on its Debt?).” I’m a long time MassMutual financial advisor, with a Business Degree (Finance major). I’ve read most of your articles the past several years, and five things that have never been addressed in the national and global discussions are:
1. Taking the long run approach to spending “other people’s money” (matching short run upticks in amount of income with short run, non-entitlement-oriented expenditures, and more “count-on-it” sources of income with long run and entitlement expenditures (while building a seignificant, emergency reserve)….instead of taking the political, short-run approach to even long run programs (from entitlements to roads & bridges…the real cost of which is the cost to build, then to maintain, then to fix when broken, and then to replace (plus interest)),
2. As we wind down “making war,” and make cuts in the military budget (the spending for which fueled a great part of the private sector economy), we cutting federal spending, but also cutting the “non-stimulus” stimulus, and directly putting more young, working age people back into the private sector, looking for jobs (many of which have been cut by the recession, and more now by cutting military spending….dramatically cutting the need for manufacturing bullets, tents, todays “C-rations,” gasoline, health related products, food, and a list longer then all of our arms put together). What is the calculated impact of that on economic recovery?
3. Part of the lack of job growth expected in the “recovery” is because employers, in cutting the fat, have gotten leaner, meaner and more productive with their remaining resources (human and otherwise). In addition, technology continues to make us all more productive, in a variety of ways. That means, job “growth” is required just to keep us with a level workforce.
4. Regulation: In the short time since HIPAA, FINRA, Growth Management Acts and a hundred other regulation-generating bodies have been in existence, the productivity of everyone in every industry has been cut by 1/3 (all else being equal). I am confident that eliminating HIPAA alone the cost of medical care could be cut by 1/3. All these “protect us from ourselves” regulations not only bog everyone down every day with “mostly meaningless, make work/keep people busy covering asses” work, but each step makes us that much less productive, cutting potential government revenue, while increasing the costs of monitoring and policing these programs.
5. How productive is the money being sspent by the government? You can spend money to buy a fish to feed another man, or you can teach the hungry man to fish and to teach other men to fish. Meanwhile, you can incent (if necessary) other private citizens to feed the man meanwhile. Building regulations that decrease production (or, make industries out of watching each other, which doesn’t build anything with equity, or of added value) and spend a dollar to get a dollar, is less than productive. In fact when people ultimate rebel, the negative productivity can be disastrous. If the givernment is going to “stimulate” the economy, it should be in the form of investment. When we have unlimited energy, and the ability to transfer it long distances without significant loss, that, along with the micro-robotics that require far less energy to operate, the world as we know it will change. Invest in developing technology that is 100 times more effective producing solar energy than it is today. We can already produce a cold fusion reaction, we just can’t contain it long enough to be useful and economical….provide incentive to develop the containment and distribution technology — something that will not only make everyone more self-sufficient, but more productive. Add an investment in clean water technology (cost-effective desalinization plants, etc.) and we have productive money…investment that will spin off benefits for a thousand years. The NASA budget is a prime example — it will be spinning off a multitude of benefits for nearly ever.
Food for thought.
Thanks for all your great work Jerry.
Terry