Focusing on the Economy Longer Term

by: FinancePM10b

QE2 and the tax cuts are policy aimed towards boosting our weak and slow economy. As the Fed, the government, and economists tackle and decipher our economic climate, many fail to recognize that we have a structural long-term problem, and that short-term remedies will not be sufficient. While QE2 may arguably have been a complete shambles, as Paul Krugman argues, we need to focus on implementing actions that will have a long-term effect, rather than providing a short-term boost with the slim possibility of carrying over to big picture growth.

I say, block those metaphors. America’s economy isn’t a stalled car, nor is it an invalid who will soon return to health if he gets a bit more rest. Our problems are longer-term than either metaphor implies.

Krugman makes this statement highlighting that the economy cannot function on short-term measures, rather needs sustained support. I agree with the Princeton professor that we are in a state of deleveraging, as Americans worry about paying off their debts. This view point is shared by economist Gary Shilling, in which I shared an interview about his new book.

As Americans continue to pay off their debts, they obviously cannot spend the way they did in early 2007. Banks were extremely generous and people weren’t realizing what they were getting into. Many people are concerned that we should be scared of inflation because of QE2, rather I view signs of inflation as more of a blessing. Rather we should be more concerned about deflation as Americans will continue to save as they deleverage their balance sheets.

As Krugman states:

What the government should be doing in this situation is spending more while the private sector is spending less, supporting employment while those debts are paid down. And this government spending needs to be sustained: we’re not talking about a brief burst of aid; we’re talking about spending that lasts long enough for households to get their debts back under control. The original Obama stimulus wasn’t just too small; it was also much too short-lived, with much of the positive effect already gone.

Although this raises the issue of increasing US debt even more, America needs to spend money to get out of the jam it put itself in, and sucked other countries into. Without a sustained government spending program, today’s problems will continue years from now, and will eventually evolve to be the new normal, without any measures whatsoever to cut down the deficit. Do we really want to live in a society with almost 10% unemployment and no growth? Once the economy picks up, only then can we focus on cutting down the deficit. We simply cannot attempt to cut the deficit, decrease spending, while expecting economic growth at the same time. This violates the laws of quantum mechanics.