Thursday, November 6, 2008

Now What?

Now that the Obama and Merkley have won, the reality of the enormous challenge of the current economic catastrophe is sobering. With respect to John McCain, the fundamentals of the economy are not strong and Oregon, along withthe rest of the country, is facing the real prospect of a deep and long resession that will bring with it large scale unemployment and crashing state revenues. [And by the way, to reference an earlier debate on tax structure, consumer spending declines and job losses are happening concurrently, so it is not clear that sales taxes would help that much] We are well along in the process of economic meltdown, and pretty far along in attacking the issue at the forefront of the problem: the credit crisis.  Progress has been slow, but it is happening: the LIBOR is down, the TED Spread is down, the A2P2 spread is down (a measure of the health of the commercial paper market), but Treasuries are still too low (indicating a lingering flight to safety urge).  However, there are still a lot of serious problems with the financial health of major banks and corporations, and consumer confidence has completely fallen off a cliff.

So what is the federal government to do?  A number of prominent economists are now urging ramping up fiscal spending on domestic projects (think WPA and CCC).   Some suggest that this should be done through transefers to states for infrastructure projects to help stabilize state budgets.  The basic idea behind such spending (besides the direct benefit of helping out unemployed families and the like) is that by getting money into the hands of consumers you provide a boost to spending, allowing revenues to flow to firms who can invest and create new jobs, etc. Essentially it is to stop the downward spiral we are currently in of a contraction in spending, thus a contraction in jobs, thus a further contraction in spending in spending...

I think that the idea is essentially correct, though I am cautious about the scale of such an enterprise. But I think it can also be done with the goal of improving the future economy in mind. Investments in renewable energy projects, mass transit, education - especially through support for university tuition - could yield not only a quicker and more robust recovery, but could also create an asset that yields dividends long into the future.

I think it is also necessary to resist the appeals to populism that could negatively impact future growth in Oregon and in the US. Jeff Merkley's increasingly populist protectionist rhetoric makes me worried that democrats will use their newfound power to reverse some of the progress we have made. We need more intelligent trade policy for sure, but we do not need less trade.

This will be a trying couple of years for the democrats as they try to steer the US out of the economic doldrums, they can do so two ways - they can use this period of adjustment to make fundamental changes in the economy that will ensure a brighter future, or they can return to the failed policies of the past that will leave us more isolated and further behind. Let's hope they get it right.

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