Christopher Chantrill explains why the democrats are completely screwed.
[T]he two political parties are diametrically opposed on recession-fighting policy. The Republican recipe to “boost growth” is to lower tax rates and regulation, and the Democratic recipe is to “invest” in stimulus spending. For Republicans, “structural economic policy changes” means reform Social Security and Medicare; for Democrats it means raise taxes.
There is no “agreement.” There is only a game of chicken to see who blinks first before August 2.
But we are conservatives. We do not just want to “win;” we want to do the right thing. How do we get out of the recession?
The best way to understand a recession is this: It is a period of adjustment during which the malinvestments of the previous boom are liquidated. Usually, in our era, booms are ignited by cheap money injected into the credit system by government. Cheap money seduces people into borrowing too much.
In the 2000s boom the malinvestments were the homes that millions of people bought with cheap credit, courtesy of Fannie, Freddie and CRA. Homebuilders expanded and sucked a ton of workers and capital goods into homebuilding. Everything looked good until interests rates rose and home prices started to decline.
You know what happened next. “Malinvestment” became nightmare investment, as the greedy bankers foreclosed on millions of homes, and home prices cratered.
But at some point the foreclosures will ease up, bottom-feeders will buy up the flood of houses, and home construction will resume.
The logic of Democratic “stimulus” is that if government shovels out enough money it will tide the economy over the crater. Home prices will recover, businesses will revive, and growth will resume. But what if home prices don’t recover before the stimulus runs out?
Back in 2009, the Obama administration made a judgment, implicit or explicit, that the housing crisis would be over in a couple of years, and that cheap money (QE1 and QE2) and a trillion dollar stimulus program would tide the economy over till then. But they were wrong. The housing market still hasn’t bottomed out, and the economy hasn’t snapped back, as this chart demonstrates.
The Obama mistake was bad enough but the Obamis made a second error. Assuming that the economy would revive in accordance with Baldrick’s cunning plan, they went ahead with their plans for expanding government spending and regulation, spraying money at their deserving supporters. They thought that the economy would soon be strong enough to increase the weight of government. With ObamaCare they increased the weight of government in health care. With regulation, spending, and subsidies pushing green energy they increased the weight of government in energy production.
That’s where the slick assumptions in Cohn’s “increase short-term deficits in ways that boost growth” kicks in. Suppose your “short-term deficit” doesn’t boost growth? Suppose it is just another wasteful government program that increases the weight of government, and postpones the day when happy days are here again?
That’s where the Obamis are sitting right now. They have shot their bolt with cheap money and stimulus spending and cranked up the National Debt by 40 percent. But here we are in Summer 2011 and there is still no light at the end of the tunnel.
To fix things the Obamis would have to adopt the Republican agenda and reduce the weight of government. They would have to repeal ObamaCare, reverse their green energy boondoggle, lower tax rates, and cut wasteful government spending.
You can see the problem. For the last 40 years, ever since the “unexpected” success of Reaganomics, liberals have been telling themselves and everyone else that supply-side economics is a mirage. Now they have to admit that everything they believe is wrong.
For the second time in some of our lifetimes, the American voting public has been treated to a full-scale, practical test of left-wing, Keynesian economics in operation. We saw all this before in the latter half of the 1970s.
Barack Obama’s great leap forward to the shiny new American European-style welfare state has turned a political version of Bernard Law Montgomery’s WWII Operation Market Garden, Obamacare being the “Bridge Too Far.” But the economics of the world of reality is actually a less forgiving, and much more formidable adversary, than the Germany Army in the Fall of 1944. The Allies went on to win WWII. Obama will be going to join Jimmy Carter in the ashbin of history and will soon be Carter’s rival for the title of worst president anyone can remember.