Economy: Two Views: Federal Meddling: Boon or Panacea?
Six months ago, the longest, deepest recession since the Great Depression officially ended, and things should be looking up. Corporate profits are at record levels and the stock market has rebounded.
Unemployment, however, remains unacceptably high. It’s worrisome that American corporations have found a way to make large profits without creating jobs.
We might take heart that official unemployment is down to 9.5 percent from its peak of 10.6 percent. Sadly, that reduction is not from new jobs, but because the labor force is shrinking. Many of the long-term unemployed are retiring early or giving up in despair. More than 7 million Americans have left the labor pool for good.
At the moment, interest rates are at rock-bottom levels and American corporations are sitting on over $1.9 trillion in cash. Yet companies are not expanding. It makes little sense to build or expand facilities when so much existing capacity stands idle and demand is weak.
We face a classic chicken-and-egg conundrum. Without more jobs, there will be little growth in demand for goods and services. And without that demand, companies have no need to hire. Breaking that cycle will not be easy.
Corporations exist solely to reward their investors by generating profits, so it falls to us (through our government) to spur job creation and economic activity, while at the same time taking steps to prevent future Great Recessions. Republicans and Democrats support sharply differing approaches.
Democrats believe that the only entity with the size and tools to turn this situation around is the federal government. It’s done so before, and we must engage it again. The recent recession did significant damage to the economy, and the repairs will be neither cheap nor quick.
The usual tool for economic stability is the nation’s central bank, the Federal Reserve. In normal times, the Fed can adjust interest rates upward to cool an overheating economy or reduce them to encourage investment and growth. We are now in what economists call a “liquidity trap.” Interest rates are near zero and have been for quite a while. Since they can go no lower, the Fed has few options.
Our best hope is deficit spending.
The Obama administration tried that with mixed results. Economists suggest that two factors interfered. One was that it was too small, limited by political opposition. The other was a sharp decline in spending by state governments. It was the latter that canceled out much of the benefit. Helping states cope with the downturn in tax revenues is a critical need. Cuts being inflicted in education are especially harmful to our economic future.
Although the Obama administration’s stimulus package stopped the rapid pace of job loss, our economy remains stuck in neutral. More is needed, and conditions are ripe for improving our infrastructure for future growth.
With interest rates low, the costs for repairing our roads and bridges, improving our airports and air traffic systems, and speeding up our rails will be far less than they would be in normal times. For too long this country has neglected the infrastructure that is crucial for economic activity.
Too, there are opportunities in alternative energy technologies and other emerging industries that could benefit from government help.
Opponents of government action point to deficits as a crisis and would have us believe that we are facing bankruptcy. Those fears are overblown and are mostly partisan rhetoric. Those voices were silent when the Reagan/Bush administrations tripled the national debt and the G.W. Bush presidency doubled it. The deficit is only a problem if we choose not to prosper.
The reality is that if we were in true fiscal trouble, borrowing costs would skyrocket as investors covered their perceived risk. But Treasury securities are currently at record lows, which suggest a high degree of confidence.
America is not broke. We remain the wealthiest country in the world, with a GDP equal to the two nearest economies combined. Our task is to restore our growth.
Essential to any fix is the return to strict regulation of our financial markets, and a sensible tax policy. Congress unwisely dismantled the structure that aided the growth and stability of our economy after the Depression. Coupled with the recently extended Bush tax cuts, which discourage productive investment in favor of gambles on dicey financial instruments, our economic growth has been stunted.
Only by harnessing the immense resources of our country can we take on a task as daunting as the one we face. Tax cuts haven’t done it. Allowing our roads and bridges to decay hasn’t helped. Firing teachers won’t improve the prospects for our grandchildren. Dismantling the Social Security system will only plunge the elderly into poverty. Allowing health care costs to soar has led to the decline of our middle class.
No nation can restore its greatness by cutting back. America must grow or face decline. Our job, as citizens, is to spur our elected representatives to get past their rhetoric and engage responsibly to accomplish the serious tasks before them. We must not let them inflict serious damage on working Americans in the guise of “shared sacrifice.”
Jim Heim is chairman of the Moore County Democratic Party. Contact him at firstname.lastname@example.org.
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