The Tea Party is winning because Democrats, GOP are clueless on the economy

September 15, 2010

The Tea Party is winning big because the U.S. economy is failing. Voters, most recently in Tuesday's Delaware Senate primary, are showing that they're disgusted with a mess instigated by Washington spoiling Wall Street and kowtowing to China, and leaders of both major parties appear clueless.

President Obama's obsession with higher taxes for families with incomes over $250,000 a year and the strident Republican defense of the Bush era tax cuts lay bare the sterile competition between the economic philosophies of the two major parties.

Neither reckless Keynesian spending and deficits nor supply-side tax cuts and indiscriminant deregulation will rescue the American economy from its quagmire. Voters recognize it, and that's why they're rejecting the political establishment in favor of new ideas.

Resurrecting America requires addressing structural impediments to growth — the gaping trade deficit with China and self-destructive corporate outsourcing hysteria, the sorry state of the balance sheets at the nation's 8,000 regional banks, and the reckless casino culture on Wall Street that is luring local governments into fiscal disaster just as it did homebuyers several years ago.

The economy is likely to grow at less than 3 percent a year — the minimum necessary to bring down the unemployment rate and provide state and local governments with the taxes they need to meet outsized obligations.

That forecast is in line with most other macroeconomists and assumes no major crisis — for example, a real estate market meltdown as home and commercial property foreclosure sales accelerate, a panic in the municipal or low-grade corporate bond market, or failures among major European banks owing to a collapse in Greece or some other dodgy locale on the ancient continent. Yet the likelihood that one of those happens is significant.

Growth at less than 3 percent means no real improvement in the unemployment situation. Forecasting the unemployment rate is difficult because it depends on both GDP growth and the adult labor force participation rate. The latter is impervious to econometric prognostication.

Just count on unemployment close to 10 percent for a long time, and leading politicians from both parties peddling snake oil, quick fixes and all round demagoguery.

It is enough to say that the economy will at best grow only fast enough to accommodate productivity growth at a bit less than 2 percent and labor force growth at 1 percent, and appreciably working down the number of unemployed in the current economic policy environment will be extraordinarily difficult.

The economy can't grow at its potential of 4 to 5 percent a year without a change in policies from Washington to clean up the balance sheets of the 8,000 regional banks — for example, as a savings and loan crisis era resolution trust — and to resolve the trade deficit with China, most importantly, ending the consequences for U.S. manufacturing of exchange rate manipulation by China and an undervalued yuan.

The exit of industry and research and development to China and other Asian venues will continue. America is outsourcing its economic strength, sovereignty and standard of living to China.

Businesses simply lack sufficient demand to add capacity because of the huge trade deficit with China and other Asian countries, and in the case of small businesses, lack capital in the form of credit from the regional banks that serve them.

Also, much higher health care costs imposed by the reform legislation, costly new financial sector regulations, and increased taxes imposed by the recent health care law are destroying demand for what American businesses make, discouraging investment and the appetite for entrepreneurial risk taking, and imposing particularly heavy burdens on small businesses.

In many ways, the United States is reenacting the British experience in the 1950s and '60s — an overvalued currency coupled with excessive state intrusion in the private economy. British growth simply did not match progress on the continent or in North America, and its standard of living fell from roughly on par to half that in Germany, and the British economy has not since adequately recovered.

The British experience demonstrates that once statism kills the entrepreneurial culture and infrastructure of industrial engineering, it is tough to rekindle except in the casinos that call themselves banks in the new millennium. British bankers live very well — most others across the pond live not nearly as well as their American and German counterparts who have similar levels of skill, education and productivity.

Meanwhile, state and municipal governments struggle, many on the edge of defaulting on bond payments, thanks to politically attractive but self-defeating non-essential spending, school board and hospital bureaucracies, and new recent federal mandates for higher health care outlays.

New York investment bankers are peddling to vulnerable local politicians the kinds of schemes that brought down Greece — sales to private investors of parking meters and other revenue generating assets to patch budgets this year but which will create calamity a few years down the road. And President Obama and House Speaker Nancy Pelosi, with their libertine view about printing U.S. bonds and guaranteeing selected local debt, can only be blamed as approving parents of local profligacy.

All this spells not economic recovery but decline. These are the last days of high living — if we can call it that — before an ill-prepared society faces yet its next big challenge with too few resources and too little courage to avert the final collapse.

Peter Morici is a professor at the Smith School of Business at the University of Maryland and former chief economist at the U.S. International Trade Commission. His e-mail is pmorici@rhsmith.umd.edu.

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