From the July 31, 2009 Washington Examiner
July 31, 2009
by Irwin Stelzer
Perhaps the most important question being asked, now that we have avoided a melt-down of the world's financial system is, "Will America lead the world out of recession into a new era of economic growth, or will America have a "lost decade," which was Japan's unfortunate experience after its credit crisis?"
The sort of decade in store for us, and for the world in which the America economy bulks so large, will be determined more by government policy than by economic forces. Economics will matter, but only as it is affected by government action.
We are not trying to forecast whether General Motors can turn out cars that consumers will like, but whether the small, fuel-efficient cars its government owners order it to turn out will prove saleable.
o We are not trying to figure out whether energy costs will rise or fall with market forces, and with the decisions of electric suppliers as to how best to produce electricity, but whether the costs imposed by cap-and-trade and "green" renewables will be so high as to burden already over-stretched consumers and add to our export woes.
o We are not trying to decide whether economic forces will restore balance to trade between America and China, but whether our in-hock-to-China government can persuade the Chinese to stop manipulating their currency so as to encourage its export industries.
The President decided at last week's meeting with the Chinese that debtors can't be nasty to their creditors, and decided not to mention the little problem of the undervalued renminbi to his visitors.
So mere economics cannot take one very far in the game of will-we-have-a-lost-decade. But it can help a little. We know that tax rates in America will have to go up to pay for the current spending spree. We know that the higher taxes will be levied on what President Obama calls "the rich".
We know that will discourage new business and entrepreneurs. But we also know that neither wars, nor plagues, nor floods, nor mistaken policies have ever succeeded in discouraging American entrepreneurs from taking the risks essential to continued material progress.
My guess, and it is just that, is that they shall once again overcome. But that's more theology and ideology than economics. Or call it hope informed by experience.
We also know that we just might -- only, might -- be able to avoid inflation if Fed
Chairman Ben Bernanke implements the "exit strategy" that he has been explaining to Congress and at town hall meetings. His plan is sensible: gradually withdraw the extra liquidity he has pumped into the system as soon as there are signs of a durable recovery. For that strategy to work three things have to happen.
First, Bernanke has to know when to implement it. Move too soon, and the tightening of credit would abort any recovery; move too late, and inflationary expectations will take hold, producing something like a 5-6% inflation rate, or worse. Bernanke's study of the economy's relapse in the mid-1930s after it began to recover from the Great Depression convinced him that the Fed was the culprit: it tightened too soon, prolonging the Great Depression.
The second thing Bernanke will have to do is make clear that he really means it when he says that the longer it takes the President to get the country's fiscal house in order, the longer he continues to pour red ink across the nation's books -- the sooner the Fed will have to offset the inflationary effect of those deficits by raising interest rates.
Which brings us to the third thing Bernanke will need if he is to implement his strategy -- reappointment as Chairman when his term expires at the end of January of next year. Obama would not be pleased if the Fed began to tighten before his own re-election run, and has his top economic adviser, Larry Summers, ready, willing and some say able to take over the running of the Fed.
My guess is that Bernanke is the sort who will talk truth to power even at the risk of his job. But he would be playing high-risk poker with a President who won't hesitate to slip Summers, who so far has been a willing public advocate for much policy nonsense, into the chairman's seat. Whether a safely appointed Larry Summers would turn out to be Obama's Thomas Beckett no one knows.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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