Economic Policy Failure

It seems to me…

The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelope our future.”  ~ John Maynard Keynes.

The U.S. Congress is once again about to begin budget negotiations.  Conservatives, who vocally strongly support a balanced budget and reduction of the national debt, also apparently believe tax reductions have such a positive effect on the economy that it isn’t necessary to worry about how to pay for them.

By any reasonable standard, the great failing of U.S. economic policy over the past 5 years — monetary and fiscal both — is that it has done too little[i].  Output lies far below reasonable estimates of potential resulting in trillions of dollars of wasted resources; unemployment remains at levels that amount to personal, social, and possibly political catastrophe; inflation has been below target (and there are good reasons to believe that the targets are too low).

GDP growth rates of at least 2.5 percent normally will result in an unemployment decrease but should not be so sufficiently robust as to reduce the unemployment rate below 5.5 – 6.0 percent.  Historically, unemployment rates lower than 6.0 percent normally have been inflationary.  While there apparently is a possibility of U.S. growth approaching that level, it is expected to remain closer to the 1.0 – 1.5 percent level throughout the next year (conservative backed sequestration is estimated to have reduced GDP growth by about 1.0 percent).

While most of us (especially those of us on a fixed income) dislike the concept of inflation, moderate inflation might be necessary for recession recovery by encouraging current over delayed investment (spending).

Extremely low sustained inflation rates, less than 2.5 percent, can result in increased unemployment if sufficiently prolonged since wage flexibility is impaired – our economy might be experiencing some of this effect at this time.  It probably is advisable for Federal monetary policy to control inflation rates to around 3-4 percent.  While a low unemployment rate can be inflationary, it is not necessarily true that a higher inflation rate has a corresponding effect on employment (though it possibly could under certain conditions).

Conservatives apparently believe the government is in competition with the private sector.  Government purchases don’t use resources that would otherwise be producing private goods, they put unemployed resources to work.  Similarly, government borrowing doesn’t crowd out private borrowing, it puts idle funds to work.  As a result, now is a time when the government should be spending more, not less.  If we ignore this insight and continue cutting government spending instead, the economy will shrink and unemployment will rise.  In fact, even private spending will shrink, because of falling incomes[ii].

Americans seldom acknowledge the public-sector role in the success of the private-sector and while accepting Hamiltonian centralized decision-making, express the Jeffersonian rhetorical opposite of the government that governs best is that which governs least.

Most social and technological progress is the result of private rather than public investment.  However, contrary to conservative beliefs, public funding is not only appropriate but necessary to effect recovery when within a liquidity trap and the supply of available money cannot be increased by further reductions in Federal interest rates.  Public funding also is essential in the initial research and development of new technologies until that technology has become sufficiently mature to attract venture capital investment.

Examples of public/private legislative funding cooperation are too numerous to credit.  The west was settled as a result of the Pacific Railroad and Homestead acts signed by Lincoln which transported people west and agricultural products east while bringing the two coasts closer but only after private investment was guaranteed to return a high profit through very beneficial property rights adjoining the rail right-of-way.  The Homestead acts enabled settlers to claim small parcels of farmland west of the Mississippi.  The Morrill Act created land-grant universities to provide higher education to many for the first time.  Social welfare legislation has reduced many of the negative effects of poverty and improved health.  Every measure should be considered from a perspective of its potential long-term benefit, not by where it originates or administered.

Government ownership of utilities or other corporate entities rarely is beneficial.  While Margaret Thatcher’s leadership style might be somewhat controversial, the economic effect in Great Britain of Margaret Thatcher’s policy of returning those industries to private ownership largely accomplished what was necessary.

It also is entirely appropriate for those in government to set high standards for public utilities and private industry: air and water quality, electrical rates, transportation safety or fuel economy, food and product safety, etc…  It also is understandable when private industry complains about imposition of more stringent standards as it obviously can affect their profitability.

That’s what I think, what about you?

[i] Krugman, Paul.  Ben Bernanke, Force of Nature, The New York Times,, 5 June 2013.

[ii] Krugman, Paul.  The Ignoramus Strategy, The New York Times,, 27 April 2013.


About lewbornmann

Lewis J. Bornmann has his doctorate in Computer Science. He became a volunteer for the American Red Cross following his retirement from teaching Computer Science, Mathematics, and Information Systems, at Mesa State College in Grand Junction, CO. He previously was on the staff at the University of Wisconsin-Madison campus, Stanford University, and several other universities. Dr. Bornmann has provided emergency assistance in areas devastated by hurricanes, floods, and wildfires. He has responded to emergencies on local Disaster Action Teams (DAT), assisted with Services to Armed Forces (SAF), and taught Disaster Services classes and Health & Safety classes. He and his wife, Barb, are certified operators of the American Red Cross Emergency Communications Response Vehicle (ECRV), a self-contained unit capable of providing satellite-based communications and technology-related assistance at disaster sites. He served on the governing board of a large international professional organization (ACM), was chair of a committee overseeing several hundred worldwide volunteer chapters, helped organize large international conferences, served on numerous technical committees, and presented technical papers at numerous symposiums and conferences. He has numerous Who’s Who citations for his technical and professional contributions and many years of management experience with major corporations including General Electric, Boeing, and as an independent contractor. He was a principal contributor on numerous large technology-related development projects, including having written the Systems Concepts for NASA’s largest supercomputing system at the Ames Research Center in Silicon Valley. With over 40 years of experience in scientific and commercial computer systems management and development, he worked on a wide variety of computer-related systems from small single embedded microprocessor based applications to some of the largest distributed heterogeneous supercomputing systems ever planned.
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4 Responses to Economic Policy Failure

  1. Silver Price says:

    More recent research has shown that there is a moderate trade-off between low-levels of inflation and unemployment. Work by George Akerlof , William Dickens , and George Perry implies that if inflation is reduced from two to zero percent, unemployment will be permanently increased by 1.5 percent. This is because workers generally have a higher tolerance for real wage cuts than nominal ones. For example, a worker will more likely accept a wage increase of two percent when inflation is three percent, than a wage cut of one percent when the inflation rate is zero.

    • lewbornmann says:

      Agree. Just a couple of points… inflationary pressure increases when the true unemployment rate falls below 5-6 percent. Currency devaluation is preferable to wage reduction as it affects all workers uniformly.

  2. silver price says:

    Under a fixed exchange rate currency regime, a country’s currency is tied in value to another single currency or to a basket of other currencies (or sometimes to another measure of value, such as gold). A fixed exchange rate is usually used to stabilize the value of a currency, vis-a-vis the currency it is pegged to. It can also be used as a means to control inflation. However, as the value of the reference currency rises and falls, so does the currency pegged to it. This essentially means that the inflation rate in the fixed exchange rate country is determined by the inflation rate of the country the currency is pegged to. In addition, a fixed exchange rate prevents a government from using domestic monetary policy in order to achieve macroeconomic stability.

    • lewbornmann says:

      Agree. This is one of the primary reasons why the amount of U.S. debt, while as a percentage of GDP is significantly less than in some other countries such as Japan or even Great Britain, should not be a problem as long as it does not increase at a rate exceeding the sum of economic growth plus inflation contrary to conservative beliefs. If sufficient interest on the debt is paid such that its growth remains less than economic growth, the ratio of debt to GDP decreases relative to the economy; i.e., the amount paid on the debt multiplied by the real rate of interest (the interest rate minus inflation) . Interest on the $5 trillion national debt increase since the start of the recession is only about $125 billion/year, which is less than 1 percent of the U.S.’s $15 trillion annual economy.

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