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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

November 11, 2010 at 10:15 AM

Deficit is not what’s hurting the economy now

It’s interesting that President Obama’s deficit commission released its recommendations as the chief executive himself is trying to avoid being steamrolled by the Chinese and Europeans at the G-20.

The reality is the federal deficit and debt have nothing — nothing — to do with America’s present economic woes. The problems include high unemployment; the housing crash, where asset prices continue to fall in nearly half of metro areas; the private debt overhang of the bad bets and swindles of the “financial services” sector; manufacturing devastated by ill-considered trade deals and offshoring, and capital markets that no longer primarily exist to create productive enterprises and jobs. There are other troubles: American “consumers” buy more than they produce in the world, and in many cases do it on credit they can’t afford. Industry consolidation and lack of anti-trust enforcement have destroyed millions of jobs and made the economy less competitive and dynamic.

The federal deficit is a result of lower tax revenues from the Great Recession and the Bush tax cuts, as well as the costs of two wars, the national security economy and the bailout of big banks now handing out big bonuses. Long-term, such areas as Medicare and military overstretch must be addressed. But, again, the deficit is not the present danger. Investors are happy to hold Treasuries and the dollar remains stronger than many American exporters would prefer. Interest rates are low.

In other words, the deficit is not crowding out private investment, a largely theoretical argument anyway. We saw in the 1990s how a mild tax increase and dynamic economy can eliminate what then seemed like an apocalyptic deficit. The commission’s anti-middle-class tilt, not surprising with Alan Simpson helping steer, would make its ideas non-starters in the past. In Tea Party America, who knows? If any such “austerity” is enacted, prepare for Great Recession II.

Even without draconian cuts, the argument seems to have been won by the tax-cut-and-austerity side. So America won’t be making the investments it should to remain competitive in the 21st century. Our trading partners must wonder if they are watching a superpower in eclipse.

Today’s Econ Haiku:

Obama, Seoul man,

Still can’t seal a new trade deal

Hard times will do that

Comments | More in China economy and business, Deficit, Global economy, Great Recession, Trade

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