Why the medicine stopped working

Our economic woes haven't been solved with supply-side tax cuts or Keynesian stimulus, but why? Both cures depend on redirecting money, but lack of money isn't the root of our economic problems. People have buckets of money to invest. Our stock market sloshes around $69 billion every single day. People (including me) have poured $11.8 trillion into mutual funds. Money sloshes into oil futures, CDOs, ETFs, REITs, hedge funds, etc. Everyone is trying to get good return on their bucket of money. Sometimes people are being enticed with slightly higher returns or considerably higher returns to invest with Bernie Madoff or in offshore Icelandic banks or in well-rated but not-so-solid American mortgage-backed securities.

OK, that isn't happening today. But it was happening in the 2000's until about 2008. Some of that money (including some of mine) vaporized in 2008-2009. But much of it was replaced somehow, maybe with quantitative easing (QE) cash, maybe with money we had shipped to China, maybe with money that was sitting on the sidelines. I don't know where all that replacement money came from, but the Dow soared from a low of 6626 in 2009 to a high of 12810 in 2011.

I may not know where all the money came from, but I can guess what it means. Our economy, and economies around the world, are going to be unusually susceptible to financial bubbles. Since around the mid-1990's, we've had a tech bubble, a housing bubble, and an oil bubble. Maybe there's a stock bubble right now. Maybe there's a gold bubble.

With all the available money, why isn't there more investment and growth? Because there aren't strong new ventures to invest in or expansion opportunities, particularly in the US, but also elsewhere in the world where bubbles have popped. Demand is strongly depressed in the US, where people and business are belatedly paying down debt instead of spending and investing. It's not wrong for people and business to do this, because there was too much debt burden. But how can our economy start growing again?

I wish I knew, or wish that old cures (supply-side or Keynesian stimulus) showed signs of working. We might be in for Japan-style economic drift. The only hope I have is that better fiscal management of the federal budget will encourage optimism and new investment. I'd love to see some manufacturing return to the US, new manufacturing that starts small and local with potential to grow, and export-oriented manufacturing based on our natural resources like farming and forests.

To me, this seems like the kind of organic growth that can work... if the environment is right. That means regulation that is light enough to both protect and encourage. We also need taxation rates that don't unduly add to the risk or subtract too much from the reward. However, decreases in taxation need to be measured against the loss of the revenue. Perhaps easing regulation is the more fruitful approach.

Conservatives are saying "Duh!" but that's OK, because this is more a message for liberals. If you want a stronger economy with more jobs available, get over your instinctive distrust of business. What suffocates business suffocates our economy and suffocates our country. The purpose of regulation isn't to tie business up in knots, but to keep people safe. Use it for that purpose only! Abusive regulation is no one's friend.

Medicine for a sick economy

So many of the policy disagreements in our government today center on how to best tend to our economy. Our economy is sick, hampered, weighed down, understimulated, over-regulated....  That's a lot of diagnoses, but which diagnosis is correct, and what is the best treatment?

I haven't ever officially studied economics, so like all of my analysis, this is based on observation conducted over 3 decades. The two main schools of economic policy seem to be Keynesian and supply-siders. In our current doldrums, Keynesians think we need another big stimulus to drive up demand, get money moving again, and spur job creation. Supply-siders focus on barriers to economic growth that diminish the natural impulse to innovate and seek profit-making opportunities.

In the last 30 years, we've seen both the benefits and the limits of supply-side economics. Lowering marginal tax rates from a ridiculously high rate of 70% to the neighborhood of 25% to 40% did encourage growth, as did breaking up the telephone monopoly and computing monopoly. It was great fun in the 80's watching and cheering on the fireworks of economic change. The mothership of Ma Bell (AT&T) was hit with a killing blow, cracked open, gave birth to the 5 Baby Bells, and her death fertilized the ground for the flowering of the telecoms boom. (Yes, it was a modern-day replay of a polynesian creation myth.)

But in the past 10 years, additional tax cuts have given us decreasing-return-on-investment, that dreaded point where the same strategy starts to fail, and you glumly realize you've got a real puzzle on your hands.

Be warned, this doesn't mean it's time to turn back to Keynesian theory, which failed us so badly during the stagflation of the 70's. We've had nearly 3 years of open money-supply spigots. Though it stopped the hemorrhaging of jobs in 2009, it hasn't returned the economy to its norms of the 1990's or 2000's. The cost of this stimulus (perhaps $1.3 trillion over the last 2 years and still high when compared to spending levels of 2007-8) is heaped onto our $14 trillion debt. If stimulus could be done at no cost, it would be wonderful. We'd just wind up the top a bit, and then let it go. But there is a huge cost to a big stimulus. I don't support another one because the jobs situation has stabilized for over a year now, and additional spending since then hasn't bought a significant increase in employment.

If the economy refuses to be cured by Keynesian stimulus, and hasn't responded to supply-side medicine in the past decade, what are we going to do? The electorate and their representatives may demand some kind of medicine, but maybe the economy can only be cured by time and minimally-invasive prudent policy. We may hate it when our doctor tells us to eat right, lose weight, get more sleep, and exercise regularly, because that is the only thing that will cure us of being a fat slob. But that is the best advice from the doctor when medicine K and medicine S/S aren't working. So stop thinking there will be a cure in pill form, and get ready for the slow, gradual, tedious, bumpy recovery.