THE BLOG
07/24/2008 05:12 am ET Updated May 25, 2011

How to Get the Economy from its Vicious to a Virtuous Cycle -- But Radical Righties Won't Let it Happen

Policies founded upon lies rarely work.

The economy has deteriorated, and will continue to spiral downward, but the reasons for the vicious cycle have been ignored, and thus the cures not even discussed. That represents a victory for the radical rightwing ideologues and a major defeat for the people of the United States.

The major reason for the downward spiral is the upward spiral in the US deficits and debt. Remember, our dear leader inherited a projected surplus of $5 Trillion, and succeeded in transforming that into a debt of an additional $4 Trillion, the most spectacular case of fiscal mismanagement in world history.

The boy wanted to outdo dad, and, boy, did he!

Even admitted economic illiterates like Bush and McCain would understand that when you accomplish such a feat, the value of your currency is likely to go down. And, it has. Yesterday, our dear leader told us that he was not an economist but an optimist. Golly-gee.

When the currency falls in value, the price of imports increases. We import most of our oil. Hence, the price of oil and gas increase.

The premium paid for gas at the pump ($1.50-$2 of the price) is a "tax" that goes to the oil companies instead of your government where all would share in its benefits.

So, the way to get gas prices down, and thus the tax on consumers that goes to the oil companies reduced, is to have a stronger currency.

How can that be accomplished? Well, interest rates could be raised. Yes, but that also increases the payments on the debt and thus annual deficits, further damages the housing market and, without dealing with the deficits, injects little confidence that the US was becoming serious again about prudent management.

Some of the radical righties propose increasing interest rates. Perhaps the dollar would creep up, but very slightly, and the impact on the housing market would be negative, thereby decreasing the wealth of the majority of Americans. Of course, the radical righties do not really care about the wealth of the majority of Americans whose home is their major asset.

But, we know what works.... because we did it in the early '90s. We were coming out of the Savings & Loan Crisis, the economy was doing poorly, George H.W. Bush kept proclaiming we were not in recession. But HW acted, and did so against his "read-my-lips" pledge, earning him the undying enmity of the radical righties, but taking the major first step that righted the economy.

He raised revenues by raising taxes. Bill Clinton then upped the ante again, and, in the midst of an economic downturn, the myths of the radical righties exploded -- the economy actually reversed itself and grew despite the slightly increased tax rates.

Here's how. The major problem at the time was that the deficits were reflected by high interest rates. That kept investment low, and the interest on the debt high, becoming a major component of government spending that accomplished nothing. By restraining spending via pay-as-you-go (aka, "pay-go"), and taking in more revenues through higher taxes on the wealthy, interest rates came down, and the economy took off.

Today, the major problem the deficits cause is a low dollar. Restrain spending, and increase revenues by increasing taxes on the wealthy and restoring the estate tax to 2000 levels and closing loopholes and imposing the surtax to pay for the Iraq and Afghanistan wars--and, voila!, the dollar will strengthen substantially.

A strong dollar will then reduce dramatically the price of oil, and gas, and reduce the "taxes" we are all paying to the oil companies. It will enable interest rates to stay down, thereby allowing the housing market first to stabilize and then rebound over time.

Why can we not do this? Because the radical righties cannot abide the notion that raising marginal tax rates slightly on the rich can indeed work. They will tell you that cutting taxes raises revenues, but even Bush Treasury Secretary Paulson said in his confirmation hearings that tax cuts "do not pay for themselves". The true irony is that the wealthy were actually much better off, i.e., they were wealthier, when their slight increased tax rates got the deficits down, and thus their wealth up.

We still would have a lot of problems: the crisis in the financial institutions, the dependence on foreign oil, global warming, failed foreign policies, etc.

But, the vicious cycle we now face could be turned into a virtuous one.