Republican or Democrat: which should we trust? Which party really knows what to do with the economy?
Let's start with the Great Recession and the Stimulus. This is perhaps the most salient example of Obama's spending. There are two main schools of thought on how we should have dealt with the recession.
On the one hand, the Keynesian School says that there are certain times (a recession) when the government must jumpstart the economy and provide spending that the private sector can't. This correctly assumes that we are going to drive up the debt, which is in theory supposed to be temporary. This is what Obama did. On the other hand, the Chicago School says that recessions are a natural colonic and will clear out of the economy weak companies. If we let some companies fail, the market will eventually take care of itself and it will emerge stronger. This assumes markets operate fairly and efficiently and that people are rational actors. This is what a lot of "market fundamentalists" want.
But what would have happened had we not used the Obama Stimulus?
Had we gone with the road not traveled in the recession, the Chicago School, we would expect that in the short run unemployment would have been much higher than 10 percent and the recession would have lasted longer than from December 2007 to June 2009 (we have been in a recovery, albeit slow, since June 2009). But the end result is presumed to be a stronger economy in the long run since all of the weak companies would be flushed out and we would be left with stronger companies. The Keynes School disagrees, stating that we would get stuck in the short run and too much damage would be done so we would never fully recover; there would be no long-run prosperous recovery. Perhaps we'll never know. Either way, unemployment is falling steadily, albeit slowly.
All this federal spending and the Federal Reserve "printing money" have raised concerns about inflation.
Republicans are generally vehemently abhorred by inflation (as if Dems like it.) Consider that one solution to our current debt crisis is to print more money, which would make the value of our debt much less, but the cost of goods would be much more. But what would happen if we drive down inflation to keep the cost of goods low? The cost of goods would go down. This is a good thing. But at the same time, our debt would be worth much more. Clearly, this is a bad thing. But wait, it gets worse.
What of the debt ceiling debate?
I know that if I kept extending my own personal line of credit and maxed it out, I would eventually be in a lot of trouble. But if I am in a temporary crunch and I need that credit line to pay my bills, and I don't have an extended line of credit, I'll be in trouble right away. This is what we are looking at right now with the national debt ceiling.
On the one hand, if we raise the debt ceiling higher than its current $14.29 trillion, we will be able to continue to meet our obligations: Social Security checks will keep flowing to seniors; soldiers will be paid; we will be able to make payments that we owe international creditors, etc. But if we don't raise the debt ceiling, we won't be able to make our payments. The U.S. will literally go into default with our creditors. There is absolutely no doubt that this would cause greater domestic and international economic crisis than what we saw just two years ago and from what we are still recovering. One of the hang-ups on raising the ceiling is over tax cuts.
U.S. House Budget Committee Chairman Rep. Paul Ryan has claimed that if we cut taxes for the rich 2 percent we will stimulate the economy and create jobs. In a perfect world, this might happen. But we face a problem since most low-paying jobs aren't going to come back from overseas even with tax cuts. We also know that from Obama's $787 billion Stimulus, of which 1/3 that were in tax cuts, corporations haven't been hiring as quick as they could with tax cuts, in fact they have been saving profits rather than investing in new jobs. Unfortunately, for tax-cut-solves-all-ills fundamentalists, 1) it is largely market ideology, since 2) the evidence is lacking that it will stimulate the economy as much as touted, and 3) "trickle down economics" has been called the horse-and-sparrow theory: "If you feed the horse enough oats, some will pass through to the road for the sparrows." Yuck.
Macroeconomics is too complicated to be fully comprehended with sound bites from either side. We need to be careful with what we ask for. The science says that there is an upside and a downside to almost everything. The art is finding the least bad downside. Politicians just present their upside.
PAUL HEROUX of Attleboro is a graduate of the London School of Economics and is currently a graduate student at Harvard. He can be reached at Paul_Heroux@hks11.harvard.edu.