My Thoughts on Economic Policy

Given the current economic climate, I anticipate that this will be a busy week for discussions. I think that the materials provided for this week - the chapter from Peters, the Planet Money podcast, and the documentary - illustrate how broadly the government can intervene in the economy, how important the economy is to the political prospects of the President, and ultimately how little control the government actually has over what happens in the economy.

Although scholars agree that the government has little actual control over the economy, there is still some debate over the degree to which the government can or should intervene. If you have not already seen this "music video" explaining the difference between the Keynesian and Hayek-ian perspective, I highly recommend it.



Here we see both an Austrian school (laissez-faire) and a Keynesian (interventionist) perspective on what and how much government should do to address economic downturns. During the debt ceiling debate, Senator Dick Durbin stated that the debt ceiling bill "Put [Keynes] to his final rest", signaling a huge turning point in American macroeconomic policy and a return to a more laissez-faire approach to the economy. Of course, we have since seen President Obama present the American Jobs Act, which includes a vast array of Keynesian based proposals (government investment in infrastructure and public service and subsidized employment programs).

The video does not discuss the current prominent understanding of economics, the Chicago School neo-classical perspective associated with Milton Friedman and George Stigler. These economists prefer a laissez-faire form of capitalism similar to Hayek, but arrive at that recommendation through different assumptions and methodologies. Despite Obama's portrayal by some on the right as a "socialist", many of Obama's economic advisers follow the Chicago School approach to the economy, perhaps explaining some of his recent tax and budget compromises. Despite its popularity in conservative political circles, supply-side economics is rarely discussed as a serious theoretical approach to macroeconomic policy. Even when the Laffer curve is invoked, we often ignore  the fact that there are two sides to the curve, one side where government revenue rises concurrent with taxation and another where it falls in response to higher taxation.

Perhaps the biggest disagreement among economists and politicians appears to be the mechanism through which government should act on the economy. As the podcast, How Do You Create a Job? illustrates, government can create conditions that are likely to create jobs either through reducing restrictions and taxation of business or through taxing and providing more services. We see this trade-off when localities attempt to attract business, as well. The key is finding the balance that fosters the creation of good jobs and provides services that government can deliver well. As this statement from the former CEO of Intel illustrates, low-taxes alone are not a good economic development strategy.

At this point in time, the future of the economy and government's role as a regulator and participant remains uncertain. We have seen a Keynesian approach with the stimulus package, a more supply-side approach with the extension of the Bush tax-cuts, and a Corporatist approach with the bailouts. Prior to the summer, the economy appeared to be on an upswing, although it was a comparatively anemic upswing in terms of job creation and unemployment. The manufactured debt ceiling crisis (itself a lesson in agenda-setting) seems to have stalled recovery due to uncertainty and anxiety about the American political process. Suddenly, we find ourselves in the midst of a likely double-dip recession with consumer confidence at a low-point and anger from both the political left and right coming to a head.  The so-called  super-committee is currently in negotiations to prevent another showdown similar to the debt ceiling crisis of the summer, but early reports seem to indicate that compromise will be difficult to achieve. The President has embarked on a "jobs tour" and is making job creation his current policy priority, but as we have seen, Congress appears unwilling to pass the American Jobs Act as it is written. In response, Obama has shifted his focus to the regulatory and implementation process to implement mortgage reform and other programs that his administration believes will stimulate the economy (If you need any further evidence that the policy stages process is not as neat and tidy as theory suggests, just look at how economic policy is currently progressing). Perhaps the biggest issue with our economy at the moment is inequality; with African Americans, Latinos, low-skilled workers, and the young facing extremely high unemployment and the erosion of wealth accumulated prior to the economic collapse. It is impossible to tell what the next few months will bring, but I can almost guarantee that discussion of the economy will dominate the 2012 elections.