Considerations for the Coming Economy

Sep 02, 2008
Author: SCP Editor

When we speculate as to whether an Obama or McCain administration would be better for Wall Street and the economy, it would serve us well to take a short term, and a long-term perspective, as well as to look outward beyond the reaches of our own pocketbooks and interests, into the nations interests and our children’s futures.

Conventional wisdom  says that a McCain administration would benefit big business and the richer segment of the U.S., and to the extent that you buy into the effectiveness of trickle-down theories, that it would create jobs and opportunities for the rest of us. Conventional wisdom also says that McCain’s plan would almost certainly increase the already massive national debt, which stands this morning at $9.46 trillion, averaging out to more than $32 thousand in tax liabilities for each U.S. citizen – payable at some point in the future.

Conventional wisdom says that an Obama administration will remove many of the tax advantages that big business and the richer segment of the U.S. has enjoyed under the G.W. administration. Clearly, Obama’s camp is not a believer that the trickle-down theories of economics have worked out well.

As reported by the Economist, which is not exactly left-leading, McCain’s economic advisors currently include Doug Holtz-Eakin, a former head of the Congressional Budget Office, who is “widely respected” and Carly Fiorina and Meg Whitman, where “neither would give the McCain administration the necessary credibility on Wall Street.”

Meanwhile, the Economist reports that Obama “has assemble a team of sharp academic economists” including Austan Goolsbee a University of Chicago professor whose record “suggests neither the hostility towards globalised capitalism nor the desire for large-scale redistribution that conservatives, spooked by tales of Mr. Obama’s left-wing voting record might fear,” Jeffrey Lieberman from Harvard, who “has produced good research on the earned-income tax credit and its role in moving people from welfare to work,” David Cutler, a health economist “who wants doctors’ pay tied to medical outcomes” and Jason Furman, who heads the Hamilton Projects, an economic policy group co-founded by Bob Rubin (former Treasury Secretary) and an economist in the Clinton administration, whose presence “rebuts criticism that Mr. Obama’s team has too little policy making experience.”

To be sure, the economic teams will continue to be assembled. Getting back to policy, policies will matter more this time than ever before. The former administration has set in motion policies that have wreaked as yet un-measurable damage on the esteem of the U.S. economy and the dollar at home and abroad. It has advocated a philosophy of debt spending of epic proportions and, as Cheney so famously remarked, “Reagan proved hat deficits don’t matter.”

While the GOP, since the economics of David Stockman, has made an art out of running up deficits to create budgetary distribution dilemmas for Congress to choose domestic spending and social programs over defense spending, we have at least had a counter measure in the form of a Democrat, or Bill Clinton, who turned the deficits back and moved towards a balanced budget.

But now, with a record national debt which is fast approaching the next debt ceiling, we have a choice in presidents that will either accelerate the debt to new levels, or one that has stated the importance of reducing it and has assemble a team, of which a part (Furman and Rubin) have a demonstrated policies that can actually accomplish this goal.

The implications are paramount, and we refer to Nouriel Roubini’s blog for more commentary on the subject:

In an essay for the Washington Post this month, Fukuyama, a professor at Johns Hopkins University, conceded that "today, U.S. dominance of the world system is slipping; Russia and China offer themselves as models, showing off a combination of authoritarianism and modernization that offers a clear challenge to liberal democracy. They seem to have plenty of imitators."

Given the perils of crystal-gazing into the future shape of the world, it is not easy to find an expert willing to hazard a guess on how long American supremacy will last. But there is at least one, Nouriel Roubini, an economics professor at New York University who two years ago correctly forecast the bursting of the U.S. housing bubble and the dismal chain of events that followed. At the time, many of his fellow economists snickered.

Roubini thinks that it will take a couple of decades for "U.S. policy mistakes in economic, financial and foreign policies (to) ... erode the power of the American empire." That would make it relatively short-lived. Depending on how you count, the Roman empire lasted more than 500 years, the British 460 or so, the Spanish around 400.

One of America's most serious problems, Roubini writes on his website, is the fact that the U.S. is the world's biggest net borrower and net debtor. The countries financing the American deficits are its rivals, China and Russia, and Middle Eastern oil exporters.

History, he says, provides lessons on the importance of financial prudence. "Empires ... tend to be net lenders, i.e. run current account surpluses. The decline of the British Empire started in World War II when the British fiscal deficits in the war and the current account deficits turned the empire into a net borrower and a net debtor."

The British twin deficits were being financed by a rising power that was a net lender and a net creditor - the United States. Whether it will ever return to that state depends, in part, on the competence, or lack of it, of the next U.S. administration. President George W. Bush's team did not set a good example.

The mounting U.S. deficits, if left unchecked, will be instrumental in our undoing as a world power. Sure, in the short run, tax cuts for the elite and big business feel good on Wall Street. Corporate profits have soared, CEO’s have reaped massive paychecks and last year stocks were hitting record levels. Meanwhile, across the nation, poverty has been increasing, the middle class has been evaporating, consumers are burdened with negative savings and record credit debt.

At every turn, and even in the face of national crisis, they were told by our administration not to worry about it but to just go shopping. Well, they did. They leveraged their homes to keep spurring on GDP growth for the sake of the economy and at their own peril. Everyone spent. Not just consumers, as big business waded into the leveraged buy-out markets while the financial services industry fed everyone’s appetites with daily doses of debt in several varieties of exotic instruments.

This morning, Freddie and Fannie are in shambles, on the brink of a Federal bailout. Korea is about to make a bid to buy one of our nation’s most historic financial institutions in Lehman Brothers. If these aren’t indications of the dawn of our nation’s decline on the world stage, I don’t know what is.

So the stakes are high, and we simply cannot continue to keep going down a road that is proven to be devastating to our economic infrastructure. Tax cuts feel good. We all want them. But we have got to get back to the fundamentals and fiscal policies that aren’t designed for short-term gain in the pocketbooks of a few while the rest fall behind. The choice seems pretty clear to us.


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