Tuesday, November 11, 2008

What Obama Should Do And What He Will Be Up Against

J.K. Galbraith, writing about another crash (1987) and other era of deregulation and crazy supply-side economics, outlines what needs doing and the consequences:
The rush to increase taxes, still uncertain as to result was unquestionably unwise in the immediate aftermath of the 1987 crash. But, in the longer run, if we are to avoid what may perhaps be called the Mexicanization of the American economy, there must be strong steps away from past fiscal policy. Taxes must be raised, one hopes on those best able to pay. This will close the budget deficit, resist inflation, allow interest rates to remain low. Low interest rates, in turn, will encourage capital investment and improvement of capital plant and avoid upward pressure on the dollar. From these steps will come our best hope for narrowing the deficit in our international trade.

Such action is not pleasant -- both higher taxes and a lower dollar address adversely the standard of living. The latter can be protected to some extent by a more rational policy on military expenditure -- a sensible response in an age of nuclear overkill. But no one can suppose that from years of aberrant economic policy there is any completely agreeable escape. Those who warned against past aberration should not now be expected to come up with a perfect solution for adverse results. And those who urged the aberration will not do so. Economic, like alcoholic, excess has its inescapable aftermath. (The Great Crash 1929 from the Introduction)
The solutions to this crash are probably obvious to all. Short term stimulus, followed by prolonged long term tax hikes and government cutbacks (since it is unlikely that military spending will come down any time soon). Whether Obama has the will and the American people the stomach for this is very, very much in question. After all, Americans have for years been told that they can have government services without paying for them and become rich by trading bits of paper to each other. I don't envy Obama one little bit.
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