Hopefuls Fight With Economic Theories

The only serious topic in next weeks presidential debate is going to be our stagnating economy. Everything else will be, or at least should be, dealt with only in so far as it affects the economy. The Romney campaign believes that the economy is the one issue on which they can win. Yet, they have stumbled again and are betting a losing hand.

The most serious domestic issues – education, infrastructure and healthcare – have to be dealt with in terms of the whole economy. Discussion of abortion and stem cells, energy and the environment, drugs and the minimum wage will get a nod from the moderators and stock answers from the participants. But the already decided and the viewers who are still open to influence will be listening to the president and the governor for solutions to our stagnating economy and that 8% unemployment.

When we talk about politics and the economy, there are three games in town. Governor Romney and his austerity, President Obama and his fiscal stimulus and Federal Reserve Chairman Ben Bernanke and his quantitative easing. All three have their own theory and their own facts.

The narrative of this recession is not well understood even by the economists and bankers. The problem is stagnation: the economy is looking at painful levels of unemployment and underemployment, falling wages and the fear that we cannot meet the costs of feeding, clothing and housing the American people. Nor can we apparently afford to educate the next generation, invest in public infrastructure nor simply run the local governments that provide and protect the context in which we live.

To be trite about our most basic problem, "it's the lost income of working families, stupid!" The facts about unemployment and falling incomes are horrendous. This depression was caused and continues because working Americans have lost income and wealth over the past 30 years.



In Pennsylvania, for instance, just since 2000 the annual income of the median four-person family has dropped by $6000. The value of housing in America fell by $15 trillion in the financial crisis. Real average hourly earnings are no higher now than they were in 1980.



Chairman Bernanke wants to attack unemployment with lower interest rates. To accomplish that, he announced, the Federal Reserve will buy $1.5 trillion in bonds during the coming year. The intent is to increase the available reserves and thereby decrease the long-term interest rate so homeowners will buy and firms will invest.



Unfortunately, this is a depression and not a recession. It was not started by the Federal Reserve implementing a tight money policy nor can it be corrected by buying bonds and lowering interest rates. Our economy is in what is known as a liquidity trap, where (a la Paul Krugman), "a zero interest-rate isn't enough to restore full employment. … [and] conventional monetary policy — open-market purchases of short-term government debt— has lost effectiveness. Period. End of story." And the end of monetary policy as we know it.

Gov. Romney's campaign has chosen the old-time religion of redemption through market-generated austerity. This is trickle-down. If we give the rich enough money through tax cuts and deregulation and we wait long enough, (their theory says) their spending and worker re-spending will "in the long run" restart the economy.

To this, John Maynard Keynes retorted, "In the long run, we are all dead." These are the economic policies of Herbert Hoover and George W. Bush. They did not work in 1929 or 2008 and they will not work in 2013.

Pres. Obama is part of the revival of the Keynesian tradition in economic policy. In the early 1930s, Keynes saw the British economy mired in a decade-long depression with huge idle resources. He said that the government should direct investment toward those resources and borrow the money do it. In the presence of idle resources, the spending will generate as much in output. If nothing else, he said, build pyramids in the South of England.

Keynesians believe that government borrowing and spending will, if large enough, generate the aggregate demand necessary to return the economy to full employment. Now we call this a stimulus. You worry about the debt after you have the economy going and you are producing the means to pay it off. This is what Obama was doing with the Jobs Act and other spending proposals that were blocked by congressional Republicans.

Gov. Romney's choice of the faltering economy as the means to his election is strange mainly because he has no credible plan to revive the economy. Maybe he thought Republican political obstinancy would cause an economy worse than it did. Maybe he thought no one would notice all that money going to the Cayman Islands and Switzerland and undermining their theory as well as our economy. Maybe he thought … what ever.

Now the debates are upon us and we'll have to see if Romney can come up with an alternative concrete enough to match stimulus spending.