YOU DECIDE: What policy path should we follow?

Date posted: October 14, 2011

Dr. Michael Walden is William Neal Reynolds professor of agricultural and resource economics at N.C. State University.Dr. Michael Walden is William Neal Reynolds professor of agricultural and resource economics at N.C. State University.

Media Contact: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

By Dr. Mike Walden
North Carolina Cooperative Extension

I’ve just finished reading Sylvia Nasar’s new book, Grand Pursuit. Ms. Nasar achieved fame with her previous book, A Beautiful Mind, about the Nobel Prize winning economist John Nash. In the movie version, Nash was played by Russell Crowe.

Grand Pursuit tells the stories of the leading economists of the 19th and 20th centuries. Nasar shows how the economists disagreed about both the diagnoses and prescriptions for the economic issues of their time.

We’re at that same point today. Clearly, the economy is the primary issue in the country. Yet there doesn’t seem to be agreement on solutions to our economic problems. Part of the reason is that consensus on solutions doesn’t exist among economists.

Economic policy differences center on five issues: government spending, money, tax rates, debt, and income inequality. Below, I’ll try to summarize the competing viewpoints on each of these issues and then, as always, let you decide what makes sense as the best approach.

Government spending – There is general agreement among economists that long-run growth in federal government spending is a problem, and something ultimately needs to be done to slow the rate of growth in the coming decades.

But there’s disagreement about the short-run. There is an entrenched view – that has been around for decades — that during recessions when private sector spending drops, government spending should be ramped up to take up the slack, to “prime the pump.”

Yet not all economists agree. Some say increased government spending that results in more public borrowing will crowd out resources for private companies. Others say people and businesses look ahead and conclude that more government borrowing and spending today will result in higher taxes later. Logically, businesses and households will save more today for the anticipated higher taxes later, and such saving — which means reduced spending — will simply counteract the government spending.

Money – Current Federal Reserve chairman Ben Bernanke once gave a speech in which he apologized for his predecessors not printing enough money during the Great Depression. This reflects one viewpoint, saying the Federal Reserve should actively print money (yes, the Fed can do that) during recessions so as to lower interest rates, increase the availability of credit and so spur more loans, more spending and more jobs.

Even Fed supporters recognize some downsides to this policy. First, there’s no assurance money funneled into banks will make its way to loans. We’re seeing this problem today. Second, more printed money can ultimately lead to faster inflation. Some see this as one reason behind rising food and fuel prices. And third, faster money growth in the U.S. can result in a lower international value of the dollar, which can also mean higher prices for imports and less economic clout for the U.S.

Tax rates — Economists who focus more on the “supply-side” of transactions argue the way to boost economic growth is to reduce costs for businesses. Two of these costs that come from government are taxes and regulations. Hence, these economists are in favor of tax rate cuts and suspension or elimination of selected government rules and regulations.

But again there isn’t total acceptance of these ideas. Critics say it doesn’t matter how low business costs are if consumers don’t have the income to buy. They also point to evidence showing the costs of taxes and regulations are far down the list of total business costs.

Debt — The early 20th century economist Irving Fisher identified high private debt as a reason recessions linger. As households work to reduce debt, they curtail buying, meaning businesses see fewer sales and less need for workers.

We see this process at work today. Economists call it deleveraging. It’s also a reason why some observers are calling for programs to reduce or forgive household debt — particularly mortgage debt. These proposals are very controversial. Many understandably believe that people who in retrospect borrowed too much did so at their own risk. Others, who concede this point, still say the collective impact of households overburdened with debt is weighing down the entire economy.

Income inequality — Economists like Bob Frank of Cornell University say the underlying source of many current economic problems is widening income inequality. That is, the large increases in income among the nation’s highest earners combined with the weakening of middle class jobs and incomes.

To alter this situation, Frank and his supporters recommend higher taxes on upper income households, with the proceeds to be used for programs strengthening middle income households. Obviously, Frank’s proposal flies in the face of the supply-siders and others who worry that increased taxes deter investment and spending.

All of the sides and ideas I’ve mentioned can be articulated and supported by well-qualified economists and thinkers. So it’s understandable why there is so much disagreement about what to do next about the economy.  But maybe you — and then all of us — can decide!

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The College of Agriculture and Life Sciences communications unit provides his You Decide column every two weeks. Previous columns are available at http://www.cals.ncsu.edu/agcomm/news-center/tag/you-decide

Related audio files are at http://www.cals.ncsu.edu/agcomm/news-center/category/economic-perspective/

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