The election is over. Republicans are on a roll. But the economy remains in the ditch.
The election, unfortunately did little to clarify the economic problem we face. Which is: We are in a hole. The hole was caused by too much borrowing and the collapse of asset prices (housing, commercial real estate, fancy financial products.)
The hole is deep. U.S. households took on almost $7 trillion in debt from in the seven years before the bubble burst. That's not something that goes away quickly.
Pimco's Mohamed El-Erian put it well in today's Washington Post:
As a whole, the United States is still overcoming the legacy of years of over-leverage and misplaced confidence that consumption can be financed by borrowing rather than earnings. The resulting debt overhangs act as strong headwinds to growth and employment generation.
So where are we now? Businesses are getting back, sitting on cash and waiting for things to get better. Consumers are paying down debts and saving more and waiting for things to get better. And unemployment is hovering near 10%.
Investors are shunning risk, throwing money at safe investments like Treasury bonds.
The problem is that, as consumers and businesses hang back, demand stagnates and prices fall. Thus we are flirting with deflation.
How do you change this? Democrats tried stimulus. It made a lot of sense. With everyone else pulling back, government could step in and create temporary demand in sectors like construction that were crushed.
Did it work? Critics on the right say no, it was a hodgepodge of the left's favorite pet projects that failed to do the job. Critics on the left say the stimulus was not big enough.
What about Republicans? They want to cut government and cut taxes to boost private investment. Problem is, cutting $100 billion out of spending amounts to cutting 0.7% out of an economy that is now growing at just 2%.
And remember the risk aversion? Those getting tax cuts are highly likely to save the money, sending it back to the federal government in the form of an investment in Treasury bonds.
This is not an encouraging analysis, but it fits the facts. The analysis is not all in yet, but the election was a reaction to Democrats not getting the job done. But I am not sure the election has clarified the economic task ahead. How do we get out of the hole?
Source: http://www.pbs.org/nbr/blog/2010/11/election_over_problem_remains.html
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