Wednesday, July 2, 2008

"Chronic, Rather Than Acute Pain"

This recession looks like it will be a long one, according to experts quoted in the New York Times. This is consistent with the stagflation of the 1970s and early 1980s - normally, consumer demand picks up as unemployment lifts, but if inflation stays high because of fuel and food shortages, there's no reason to believe that demand will have as easy of a time resurrecting itself.

My suggestion? Well I'm no macroeconomist, but it seems to me that the infrastructure of the U.S. is in dire need of repair, and as Senator Obama has pointed out, we need to substantially reinvest in our military - our stock of equipment has depreciated rapidly over the course of the Iraq War. Those sound like two Keynesian policies I could get behind.

The only problem is, borrow-and-spend Republicans (and not a trivial number of Democrats) have run up budget deficits for the last seven years or so. Even bigger deficits are projected over the next several decades because of the entitlement programs (Medicare and Social Security). It could be a good time to reign in those two programs, which would help the budget and provide more flexibility on Keynesian countercyclical measures, but there's bound to be an uproar about "cutting my benefits during a recession!!". It's also questionable whether we would really want to cut a program that provides so much revenue to the health care sector - one of the fastest growing sectors in the economy. That just seems counter productive.

Another possible solution, of course, is raising taxes. That wouldn't find many supporters in a good year, and certainly not during a recession.

So we're in a pretty tight bind here. It is worth noting that lots of great public investment projects are out there that would provide jobs and set us on the path to stronger long-term growth. Whether we can get these projects off the ground is a different story.

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