December 4, 2009
by Irwin Stelzer
Economists and politicians are often singing from different hymn books -- or at least those who still remember what hymn books are. Looking down the road, as the economy recovers from the recession, many economists are worried about the possibility of inflation.
Not right away: There is too much excess capacity in the economy, especially in the labor market, for that to be an immediate worry. But down the road, perhaps at the end of next year or early in 2011, the flood of newly printed money -- "quantitative easing" in the economists' jargon -- will trigger an inflationary surge.
Unless, of course, the Fed starts calling those dollars back, raising interest rates and doing what central banks are supposed to do when -- no, not when, before -- inflationary expectations take hold.
But to take away the punch bowl just when the party starts getting interesting, as one former Fed chairman described his role, the central bank must be independent of politicians, who prefer a red-hot, job-creating economy even if it eventually overheats. Unfortunately, the direction of congressional policy is to make the Fed responsible to the very politicians who will do all they can to prevent it from doing its inflation-fighting job.
There is another disjunction between economists and politicians. Economists know job creation lags behind an economic recovery; politicians know, or think they do, that the only thing that can save their jobs is a rapid decline in the unemployment rate, soon.
Facing the prospect of joining the army of the unemployed if unemployment stays high, politicians, or at least the liberal Democrats among them, want to develop direct job creation schemes of the sort that Franklin Roosevelt introduced during the Great Depression. Economists know that another deficit-increasing spending package is no long-run answer to sustainable recovery; for politicians about to enter an election year, there is no long run.
Indeed, whereas politicians see the joblessness problem as calling for still more government activity, many economists see it calling for less government activity and more certainty.
Small businesses create most of the jobs in an economy such as ours. But small businesses find it impossible to plan on expanding because they do not know what it will cost them to take on more staff.
What they do know is that if the health care bill passes in anything like its current versions, their health care costs will rise. They know, too, that if the pledges the president is about to make at the Copenhagen, Denmark, climate change summit are ratified by Congress, their energy costs will rise.
And, finally, they know that passage of the president's health care and energy programs, not to mention finally paying for the trillions of debt he is incurring, mean higher taxes for them.
This is not exactly a setting in which businessmen, especially small-business men, see a bright future. Uncertainty about some things, certainty about even worse things -- so hunker down, don't hire just yet, wait and see if things turn out as badly as it now seems likely they will.
But all is not lost. Americans know we have in the past survived political ignorance and economic tribulation. We are optimists: Whereas European businessmen talk to me of "problems," their U.S. counterparts see "challenges."
Seventy-nine percent of Americans profess themselves "happy" with the way things are going in their lives, 88 percent are "satisfied with the life I lead," 68 percent deny that the American dream is beyond their reach, and 69 percent deem it "likely that my children will achieve the American dream."
This is the prevailing attitude in a country that the current administration thinks is in need of major repair -- and for which it plans "reforms" to which the majority of Americans are opposed. But parties that win the White House often develop agendas having little to do with the concerns and desires of a majority of voters. That's why they are so often surprised by the results of midterm elections.
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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