Eyes that fail to see; Ears that fail to hear

It is rare when a public debate that so consumes the nation has so little to do with the national welfare. At present, the United States runs the risk of blowing through its debt ceiling because a portion of the House Republicans, representing a minority of the American people, refuses to negotiate in good faith for a solution. In a larger sense, however, this is the wrong debate at the wrong time in the wrong nation.

The United States still suffers from the most severe economic downturn since the Great Depression. Better than 9% of those still looking for work are unemployed and the real unemployment rate is well over that. The Great Recession has hurt the prospects of all Americans, but, as the NYT reported the other day, it has hit Latinos and African Americans particularly hard. 

Unlike previous postwar recessions, this is a financial collapse. Most households accumulated high levels of debt in the past twenty years--to compensate for the lack of any real rise in median income over the past 30 years--and do not feel free to spend until they work debt down to manageable proportions. The president, to give him some credit, understood the problem and sought to fill the demand gap with the economic stimulus. Unfortunately, it was too small and too weighted toward tax cuts. So, it didn't possess the potential to generate the demand needed and what demand it could create was lowered by the fact that people too often bank tax cuts rather than spending the funds. Plus, heavy cuts at the state and local level counteracted federal spending. The president also, to his credit, pursued other policies, particularly help for the auto industry, that paid major dividends for the economy, meaning that it is in significantly better shape than it would have been otherwise. But it's still not good.

Equally important, although most news organizations fail to cover foreign economic news, the rest of the world is currently facing serious problems. Even as Republicans needlessly risk the nation's credit rating, the Euro Zone stares into a serious financial abyss. Unwilling to restructure any debt, it seems, the policies of the European Central Bank--and Germany/France in addition--threaten to create financial catastrophe. Nations such as Greece, Ireland, Portugal, Spain, and Italy find themselves struggling to stay in the euro, looking at decades of austerity because they cannot devalue their currency in order to become more competitive on the world market and grow out of recession, as, for instance, Britain did in the early 90s. No "rescue" package for these nations or the euro has done the job. The interest rate spread between Italian and German bonds is, this morning, as bad as it was before the most recent effort. By the by, it is delusional to think that the peoples of these nations will not eventually look to more political, more radical solutions to their problems, given that they have had almost no say in current policy. And, of course, three of the four BRIC nations (Brazil, India, China)--who have driven what world recovery there is--are now seeking to slow economic growth in the face of mounting inflation. In short, the world economy is in serious trouble.

Any rational set of American policymakers, as even that center right bastion of economic advice,  The Economist argues, would nurse the present recovery through short term stimulus (aid to states is my favorite--it gets spent on important stuff and prevents state cuts from balancing federal spending) and develop medium and long term plans to bring the debt down gradually as good times take hold. Instead, Washington obsesses over cuts to the budget at a time of weakness. This is ridiculous. Again, The Economist (its Economics focus columnist): "In a recent study of 173 fiscal-policy changes in rich countries from 1978 to 2009, economists from the IMF found that cutting a country's budget deficit by 1% of GDP typically reduces real output by about two-thirds of a percentage point and raises the unemployment rate by 1/3 of a percentage point." Small percentages, but bad numbers in terms of real money and people, at a time when we're alreadyy suffering. Surprisingly, it seems, contractionary fiscal policy contracts the economy.

Nothing better illustrates the complete disconnect between the capital of a nation and its people than this present debate. Those in Congress, commenting in the media, working in the bureaucracy, issuing reports from think tanks--they have good jobs, with health benefits. They've convinced themselves that only debt matters. More important, it seems, they all know only each other and cannot seem quite able to imagine the distress in the rest of the country. They talk to each other, listen to each other, dine with each other, golf with each other, and gossip about each other, including our ostensibly Democratic president. It is a perfect example of groupthink; it's liable to work as well as it always does. And, as in Europe, if the leaders of presumed "democracies" fail to address the problems suffered by their peoples, then they are likely to turn to more potent alternatives.

Comments

[Laura]

Thank you for your clarity of thought. I'm personally in a sheer state of panic.

[Faith]

Nice blog. I will keep visiting this blog very often