The Devil You Know

I liked David Leonhardt’s piece in the New York Times on Tuesday, but parts were a bit too wishy-washy for me to take any general causal correlations from it.  I tend to focus on the cause and effect portion of economic policy and sometimes, I’ll miss some of the more basic things that even macro-economists pick up on.  Take the pay increases among German workers over the last five years.  I tend to think of these jumps as cyclical as opposed to market-driven, but others disagree:

“After performing worse than the American economy for years, the German economy has grown faster since the middle of last decade. (It did better than our economy before the crisis and has endured the crisis about equally.) Just as important, most Germans have fared much better than most Americans, because the bounty of their growth has not been concentrated among a small slice of the affluent.”

Of course, there are other factors that could account for this.  We could look at just how bad the German economy was when it rebounded, but then again, you could make the same argument for the American economy.  The real difference between Germany and America, especially in relation to how our economies have performed after the global downturn is when and why our respective governments decided to act.  The Obama administration proposed a $787 billion stimulus that they said would solve all of our near term problems.  Although I fault them for their over-selling of the plan, they were right to try short term stimulus as opposed to a debt breaking long term stimulus that represents most of what’s currently going wrong in Germany.  Our big takeaway from all of this shouldn’t be what worked as opposed to what didn’t work, but how things worked and why they worked that way.

Germany’s plan worked out well in the short term, but left a long term problem in place.  Our stimulus proposal worked mildly in the short term without causing a huge problem in the long term.  So, in other words, the two programs worked in exactly the opposite way that each country had hoped.  If we had adopted a more aggressive stimulus we may have had better job growth over the last 12-18 months, but we’d pay for it now once the long term debt of our country exploded over the next 6 months.  Much has been made about why the Obama administration pivoted from stimulus related reform to debt-reducing reform.  Most have faulted them for it because of ideology, but the vast majority are just piling on because it didn’t work out the way it was promised to work out.  I doubt the reaction would have been any more subtle if the grandiose promises hadn’t been made however.  This is a crisis that exists because we acted on the problem before we understood a) the true magnitude of the problem, b) how far-reaching the problem was, and c) what the worst-case scenario was in terms of jobs, negative GDP, and inflation.

My takeaway on all of this isn’t so much that we got it wrong as opposed to the idea that we haven’t really figured out how to get it right.  Economists are blasting both sides of the aisle for the debasing of our currency when neither side is looking at what that actually entails.  No politician, for instance, wants to look at the fact that it is because the dollar is weak that our economy still has extremely good buying power.  People won’t admit that because they see it as somehow being anti-American.  It’s not, it’s simply admitting that we still buy stuff even though it’s really tough for us to sell stuff.

In the end, we need to look at what policies are going to help us going forward.  I actually think that because the Obama administration started off this process by embracing Simpson-Bowles (unlike Republicans, who say it doesn’t go far enough to “rein in government spending”) we are in a better position to address the long term needs of the economy.  My problem with the administration is that they are not selling their policies well enough, but that has been my problem with the administration since day one.  We should be taking the Bush approach to re-election, saying things like “we can’t change direction mid-stream” and the rest of that crap that we were sold on in 2004.  The world is a scary place and right now the only thing scarier than the devil you know is the devil you don’t and those “candidates” on the Republican side of the aisle are about as far away from understandable as you can get.

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