The country is consumed right now with the fight over the Federal budget, specifically Rep. Paul Ryan's (R-WI) plan to balance it by (mostly) radically cutting spending on medical programs, especially Medicare. The recent Republican loss in New York's 26th district's special election -- which had more to do with my friend Jack Davis running on a third-party ticket -- has been interpreted as a referendum against the Ryan plan. And the states are, of course, tied up in budget battles of their own, most visibly the aggressive push to cut the cost of public employees by curtailing their unions.
Unfortunately, while all these fights are, of course, important, they are still, fundamentally, the wrong economic issue for America to be fighting over right now. Because despite Rep. Ryan entitling his plan "The Path to Prosperity," none of these controversies touch upon the true fundamentals that determine that prosperity.
All these controversies are, at bottom, about one thing: rebalancing public-sector spending. And it is fantasy to imagine that this is the key to putting our economy back on track.
To hear some Republicans talk, you'd think that if only we squeeze hard enough, and go whole hog for their eat-your-spinach skinflint economics, prosperity will return. This is the elevation of deferral of gratification to the master key (if not the sole!) economic virtue, from which all else will follow. If only we're tough enough on ourselves right now.
Unfortunately for Republicans, that kind of tightwad economics rightly died in the Keynesian revolution over 70 years ago.
It's not so good for Dems either.
To hear some of them talk, you'd think that if only we pump up government spending enough, perhaps financed by higher taxes on the rich, we can pump-prime our way back to prosperity. This is the elevation of counter-cyclical Keynesianism (spend your way out of a cyclical downturn) into non-stop stimulation of the economy, whether its problems are cyclical or structural.
The fundamental economic problem we face right now isn't recession--in which case we could just sit back and wait for it to end, with a little help from the standard playbook. It is the structural underperformance of the U.S. economy, for reasons that weren't caused by the recession and won't go away when it ends.
As a result, Republicans and Democrats are arguing about how to divide the pie, when the real question is how to bake more pie in the first place.
So... what is the solution? What do we have to fix?
The number one thing is trade. Free trade collapsed a very long time ago. What we have today is not free trade at all, it's ruthlessly manipulated trade -- manipulated by America's big trading partners, starting with China but including many others. And we're doing nothing to stop them.
America's titanic ($497 billion last year) trade deficit is ripping the guts out of industry after industry, but we have no answer. And you can't gut industry after industry and expect not to reduce your GDP.
If we didn't have this horrendous trade deficit, we simply wouldn't be fighting many of these budget battles. Why? because we'd have a larger GDP, so tax revenues would be higher. Spending on public benefits would be lower, and painlessly so, because fewer people would be poor and middle-class people would have more money to take care of themselves.
How much GDP have we already lost?
The Economic Strategy Institute estimated in 2001 that the trade deficit was shaving at least one percent per year off our economic growth. This may not sound like much, but because GDP growth is cumulative, it compounds over time. Thus economist William Bahr has thus estimated that America's trade deficits since 1991 alone (they stretch back unbroken to 1976) have caused our economy to be 13 percent smaller than it otherwise would be.
That's an economic hole larger than the entire Canadian economy.
Size of GDP is, ultimately, more important than size of government. We can have legitimate liberal vs. conservative arguments over the latter, but even from a conservative point of view, it's far more important to have a government that conduces to a GDP large enough to provide all the things we want than to have a small government per se.
Growing the economy may, in fact, call for increased spending in some areas. Even a precocious third-grader can see why even fiscal tightwads should make an exception for spending that ultimately brings in more money than it costs.
What kind of spending are we talking about? One kind is government programs to fill in the gaps in the private sector's innovation capabilities. Such programs fund, for example, technology research to bridge the gap between pure science and corporate research and development (R&D). This is the so-called "Valley of Death" in the innovation system: the private sector can't make money doing such research, but it can't ultimately keep generating new products unless somebody does it. So it's appropriate for the federal government to step in.
America's hidden history of doing this stretches from the Internet back to founding father Alexander Hamilton. We still have such programs today, but on a tiny scale compared to what we need -- and tiny compared to what our rivals do.
Thus the giant stimulus package it passed in 2009 included money for every Congressional pork barrel under the sun, but nothing for one of the industrial-policy programs with the best track record of saving and creating jobs: the Manufacturing Extension Partnership, despite a campaign promise to double the program's funding. This program maintains a network of centers in every state designed to help American manufacturers adopt innovative technologies. One evaluation found that it generated $1.3 billion a year in cost savings for manufacturers and $6.25 billion in increased or retained sales, all for an annual federal outlay of only $89 million.
Another good but underfunded program is the Technology Innovation Program. Free market ideologues have repeatedly tarred this program as corporate welfare despite the fact that an audit by the respected National Academy of Sciences vindicated its claim to generate economic benefits far exceeding its cost. One single $5.5 million grant, for example, seeded development of the small disk drive industry, which enabled creation of the iPod, the iPhone, TiVo and the Xbox.
This is how you make an economy grow -- not by squeezing the economy you already have, or borrowing yet more money to "stimulate" it.
As a result of America's neglect of such programs, there is a starvation of basic and applied research in areas such as biocomputing, computer architecture, software, optoelectronics, aeronautics, advanced materials, factory automation, sensors, energy conversion and storage, nanomanufacturing, robotics and green energy.
We are in danger of having our economy fail to grow because we were so busy arguing over the harvest that we neglected to plant the seeds.
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ITS ABOUT BUILDING CONFEDENCE
The very way we calculate GDP is flawed. Government is an expense. It is needed to provide security and limit the use of force and enforce contracts. Money invested in makeing these functions more effective is well spent. Everything else is a luxury, a drag on the productive side of the economy.
People working together to create wealth freely is what creates a better future.
For profit institutions do not invest unless there is probable profit in the foreseeable future. Remember business are run for profit, they do not care about solving social problems unless there is money to be made. Businesses do benefit, however, from the vast majority of major technological advancements that have come from grants and programs administered by governments.
There is justification for Government to invest in military technology. This should be justified based on needed military capability. If it has economic consequences beyond the military use then great.
Manned space flight is a good example of wasted resources. We can explore space much better with unmanned flight far better and at lower cost.
As far as private business and profits. What does it mean when investment is made without regards to profits? It means that people do not value the results of the resources as much as they value other things. So the resources would have been better spent on other things.
Remember, the once unregulated derivative market, which is 20 times the size of the world GDP, allowed for the housing collapse to encompass the entire world economy. Housing collapse was simply a tipping point for the vast faults of no regulation.
Unfortunately politicians have undermined market discipline caused by the profit and loss system. They protect bankers from the down side cost of risk and then everyone blames the free market.
The Democratic party's traditional role as the fiscally responsible party is admirable in good times, but seemingly knows no distinction. A recession requiring massive investments in the safety net, green technologies and infrastructure is no time to obsess over the deficit. The party is deficit conscious to a fault, and it contributes to a consistent shortchanging of vital national priorties.
just like the R sweep of 00 allowed a swing to the right that let us see--finally--that their policies really DON'T work. Trickle down doesn't, and that is clear now, even if the deficit is an issue it can be solved in a progressive way see the ppeople's budget to see how that could happen.
And those policies need to benefit ALL Americans, rather than just the few who clawed or inherited their way to the top of the corporate ladder.
It is becoming crystal clear we need a public option or public works for everything. It would create jobs and that is about the only thing that will in this sociopathic situation we are in. Let business whine, they aren't hiring.
Bush stuffed every government office he could with republicans from top to bottom, so they are doing ok.
Maybe businesses would start being required to pay more taxes.
They may want to pay more taxes if they see there is going to be cheaper cost competition. Real competition.
We don't need all the jobs in the country to be "public works". We need just enough "public works" to rebuild the foundation on which private enterprise can prosper.
Mr Fletcher's argument is that there is work that business will not undertake because business cannot earn a profit from it. But that work must be done in order for business to be able to make those profits.
That IS a proper role for government action. Comes under the Constitutional mandate to "promote the general Welfare" (see the Preamble).
Would you be willing to pay 5 cents out of every dollar if in return you could double your money? Would you pay $100 to turn $1000 into $2000 (leaving you with $1900 net)?
Costs will not come down the way the country is set up now.
Free market is really an unfair market. Freedom is the freedom to charge high prices and pay low taxes. Whoa.
We could start up a housing project for low income people, scattered here and there. Like Carter does with habitat for humanity.
One big problem is if the government competes with any business, then they catch hell from the business, even though this house probably wouldn't be built by the 'for profit builder'.
That is why the government started giving food stamps to the poor or those out of work. It is to buy groceries at the grocery store. The grocery stores were furious that they were taking their business by giving the poor commodities, even though the poor couldn't afford to buy from the grocery stores.
They have financial security and a fine pension they can take at the age of 50 with almost free insurance.
They are doing the opposite in this country and other developed countries. They want to bring wages and benefits down to level our wages with third world countries. However, they can't let go of the profits. So they expect us to pay high costs and receive low wages.
It may be that we are even paying for their setting up overseas.
They say it will take 30 years to level the playing field.
Just what we need is George Bush financial terrorism in countries all over the world. Sadism at its finest. Our leaders in government and business are working together for their benefit, not ours.
They won't even be around in 30 years, but they are doing fine with their incomes. They are setting it up so their children can continue their reign of profit terrorism.
The leaders don't push for copyright and patents enforcement overseas either.
There are many more things the government has given to the businesses including to banks and keeping interest rates low so the businesses can get lower cost loans. Banks pay almost no interest to savers then charge around 20% interest on credit cards.
We all push for jobs and fairer trade. Many say that if we had more jobs, then the increase in taxes from more workers would solve a lot of problems.
We still need to stand up against those who want to ruin FDR's New Deal. The republican leaders keep saying they are improving things for the children. I think they are blurring it up. I think they are making things better for the future rich children and those who will have businesses passed down to them.
Nothing indicates to me that our children and grandchildren won't need the programs that are intact now. They may need them more.
What is needed is a Forensic Accountant to examine every Congressman and Senators investments, bank accounts (including offf shore accounts), all elements of Government spending and the National Debt, "Who, What, When, Where, Why"
Of course the accountant would need an acccurate set of books to examine, not the set of books released to the public.