Sunday, September 19, 2010

It's all connected

I'm concerned when I hear smart people like Powell talk about the need for jobs and the need to cut the deficit (in the same sentence).
I'll explain why.  Let's consider the main Economic challenges facing the country.  They can be categorized as follows: securitization (banking), the housing market, unemployment, lack of meaningful growth (GDP), fear of deficits.  Yes, there are others that I could list, but these are the crux of our current problems.
They are all interconnected!  Securitization of mortgages will not be fixed until the housing market is fixed.  The housing market will not be fixed until people can afford to pay their mortgages, meaning not until unemployment is fixed.  Unemployment will not be fixed until industries see demand for goods and services. Demand for goods and services must be provided (or stimulated by) the public sector, since the private sector and the consumer are broke.  THE DEFICIT WILL INCREASE AS A PERCENT OF GDP IF GDP DOES NOT START TO GROW - WE CAN'T CUT ENOUGH GOVERNMENT SPENDING TO LOWER THE DEFICT OTHERWISE!  AND, GDP WILL NOT GROW WITHOUT MORE STIMULUS OR SOME EFFECTIVE QUANTATIVE EASING. AFTER GDP AND EMPLOYMENT ARE ON THE RISE IS THE TIME TO CUT GOVERNMENT SPENDING - NOT BEFORE!!!!  And, I'll be the first in line to support those cuts.
We simply need a jump start for demand.  Stimulus and QE will NOT instate a permanent dependence on government.  Stimulus will allow companies to create jobs, those employed people will spend. Their spending represents DEMAND that will create more jobs and enable more people to buy... IT MULTIPLIES!  I don't understand why I'm not hearing this message from the administration!  Wouldn't that help people's EXPECTATIONS of growth?
We need to challenge the thinking of people who call for lower unemployment AND lower deficits in the near term. In the absence of something or someone magically creating demand for goods and services, the government is going to need to do the job.  (And, we can learn from Japan's mistakes over the past 17 years - maybe that's another post).

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