Time and again, James Carville proved himself to be onto something when he said that line: exit polls show that 9 out of 10 voters view the economy as the most pressing issue on Super Tuesday.
Which brings me to the next point: our political leaders don’t know the first thing about economics.
Let us see what things have been done to “rejuvenate” the economy: Fed’s cutting interest rates, proposed economic stimulus package consisting of giving tax rebates to families and cutting taxes for businesses, freezing mortgage rates to prevent foreclosure.
None of these proposals address the real problem of our economy: for years we Americans have lived beyond our means by borrowing against our assets (read: houses) to get easy credit, but nothing lasts forever, and now that the easy credit can no longer be sustained, the whole shit collapses.
Now I understand that a temporary freeze on mortgage rates is needed for the immediate short term, but none of the other proposals really do much to mitigate the fundamental structural problems of our economy.
First, giving tax rebates, no more than $600 per person, to families sounds good on paper and is an easy political sell, but let’s examine what its effects really are. Very little. First, because the dollar is weak, so consumers pay more for imports, which we do a lot, especially on crucial commodities like energy. Although the weakening of the dollar might shift the balance of trade in a positive direction, but it’s not enough.
Second, because Americans can no longer live beyond their means through easy credit, consumers are now becoming more spendthrift, as they should be in this case. However, this means that their marginal propensity to consumer (MPC) goes down while their marginal propensity to save (MPS) goes up. Meaning: the tax rebate will not have the desired effect of pumping a large majority of the tax rebates back into the economy.
Third, tax cuts for businesses sound like a good idea on paper, and it sure pleases the constituents in an election year. However, if consumers spending goes down, demand goes down. When demand goes down, production goes down. When production goes down, jobs are cut. So what exactly are businesses supposed to use the tax cut for? Investing in new equipment? They won’t do that if demand for their products decrease, and they will not keep jobs either. In essence, much of the tax cuts down to the businesses themselves, not the workers.
Fourth, cutting interest rates have less than the desired effect, because again, businesses will not really invest because of decreasing consumer demands. Decreasing consumer demand is key because ours is an economy that largely functions because of consumer spending. And for the last decade or so, consumers have spent beyond their means, and now that they no longer can, demand decreases, a lot.
So in reality, the political actions so far do not really address the fundamental problem of our economy.
And no one is talking about investing in our crumbling public infrastructure, which is always a smart investment in the long run, and in the short run, it creates new jobs. We are not talking about Depression era WPA here, but more things like fixing roads, bridges, and our collapsing tunnels. God knows our infrastructure is in a dire state: witness the Big Dig collapse and the Minnesota Bridge collapse.
Yet no one is really talking about this pretty sure-fire way of rejuvenating the economy. Instead, all we have, yet again, is another tax cut. Sure, it’s an easy sell, but it doesn’t do shit.