|Policy for a Decaying Economy|
|by Martin Hutchinson||Tue, Sep 11, 2012, 10:30 AM|
I discussed last week how Ben Bernanke’s easy-money policies could be reversed, should Mitt Romney win the Presidency and wish to reverse them. It is only fair, therefore, to discuss the other possibility: should Barack Obama be re-elected and (ignoring his fiscal and regulatory policies, which in any case would be modified by Congress) allow Bernanke to run free with
In “Chapter VIII – The Wages of Labor,” having discussed the flourishing economies of Western Europe, the American colonies and the static but wealthy China, Smith turns his attention to the problem of decay: ”But it would be otherwise in a country where the funds destined for the maintenance of labor were sensibly decaying,” he begins.
That is of course precisely the situation in which the
This is having the same effect in today’s
If that’s not a description of many people’s experience in the
However the qualitative description is sound, and four more years of severely negative real interest rates, hollowing out the
Reading Smith makes it quite clear that, however much the Obama administration may wish to shift the burden of economic difficulties to the rich, the adverse effects of the Obama/Bernanke policies will fall mainly on the working poor. “The liberal reward of labor, therefore, as it is the necessary effect, so it is the natural symptom of increasing national wealth. The scanty maintenance of the laboring poor, on the other hand, is the natural symptom that things are at a stand, and their starving condition, that they are going fast backwards.”
If we regard Bernanke’s loose monetary policy as immovable before 2017 (or January 2018, when Bernanke’s 2014 term will end) then the economic management problem becomes clear. Economic managers, whether in a possibly Republican Congress or those appointed by Obama in his second term, will need to stem the loss of capital from the
First, the $500 billion annual
Bernankeism, by printing far more dollars than can be absorbed by world demand, tends to weaken the dollar in any case; this tendency should be encouraged, and exports should be encouraged by any means possible.
Secondly, in a situation in which Bernankeism is tending to de-capitalize the
Conversely, Congressional Republicans should adopt the “root-canal” approach on spending, forcing massive reductions in discretionary spending, entitlements and even defense in return for their flexibility on taxes. A long-term solution of the medical financing problem along the lines of the Ryan Plan, in return for a modest VAT, would be worth it on balance, provided overall spending was kept on a sufficiently tight leash.
Politically, Congressional Republicans should be able to shift most of the blame for both tax increases and spending cuts onto the Obama administration, while any loss of the
There is of course the possibility that Bernankeism will collapse of its own accord before 2017. The most likely form such a collapse would take is a sudden upsurge in inflation. Given Bernanke’s “quantitative easing” policy and the extreme nature of his interest rate policies it’s likely that an inflation burst, if it occurred, would come suddenly, rather than gradually as in the 1970s. Alternatively, an uncontrollable surge in commodity and energy prices could cause an economic downturn, as was partly the case in 2008.
In either of these cases, policies of a weak dollar combined with extreme austerity in budget policy would make the danger of a
In summary, even the prospect of another four years of Bernankeism is not grounds for excessive pessimism. While his policies, if allowed to combine with massive budget and payments deficits, could turn the
(Originally appeared in The Bear’s Lair)
Martin Hutchinson is the author of “Great Conservatives” (Academica Press, 2005)—details can be found on the Web site and co-author with Professor Kevin Dowd of “Alchemists of Loss” (Wiley—2010). Both now available on Amazon.com, Great Conservatives only in a Kindle edition, Alchemists of Loss in both Kindle and print editions.
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