The US Economy Needs Chemo

There are two huge trends affecting the world economy.  First, the world is going through the biggest economic shift since the industrial revolution.  New technology is changing every industry and it’s happening fast.

Second, the enormous credit expansion that has fueled the world economy since World War II is beginning to topple over.  It’s taking ever more debt to marginally increase our GDP.  These two macro trends are causing our economic chaos.

The US economy has cancer.  Government and personal debt are massive.  They are unpayable without monetizing the debt or in plain English, printing money.  Unemployment is at record levels and the lowest amount of working age people are in the workforce in decades.  Our government isn’t functioning well.  The stock market is recovering as the Fed prints money, but main street is suffering.

The Democrats under the direction of Barack Obama believe that we can spend our way out of our problems. They believe that if we simply print more money and put it into the economy, we’ll revive the economy and everything will take care of itself.  That’s why they passed the stimulus and believe its best to keep interest rates at nearly zero.  If all else fails, start the printing presses!  The vast majority of the trillions of dollars that have been printed have going into consumption, which doesn’t help the economy long term.

That’s the road to inflation, or hyperinflation.  To me, that’s like a doctor saying, “yeah, you’ve got cancer, just take these pain pills, drink some alcohol and live the good life and things will get better.”  In reality, you might not feel the pain by continuing your behavior, but in the long run, you’re gonna die.  But hey, we postponed the pain as long as possible.

The Republicans believe that the debt is the problem.  They believe that if we cut spending, balance the budget and get out of debt, everything will be ok.  That’s suicidal.  If we just cut, cut, cut, we’ll go into depression.  Their cancer cure is to hack off the offending body part, without anesthesia, in the middle of the forest with a dull instrument.

The Democrat’s plan will burn us to death in the long run via inflation, while the Republican’s plan will freeze us to death with huge recessions, if not depression.  There is a third way, but I believe both sides are too partisan to take it.

Instead of treating our economic cancer with alcohol and painkillers (printing money), or chopping off our leg in the middle of the forrest (austerity), we need chemotherapy (targeted reforms).  We need specific medicine that will actually have a chance of working.  The US’s economic cancer is fairly advanced, so even targeted remedies may not work, but it’s at least worth a try.

Instead of actually looking for targeted solutions, or taking a bit from both sides, both parties continue to toe the “either/or party lines” of “we can spend our way out of it” or “we can cut our way out of it.”  But it’s not bipartisanship.  It’s a third way.

So what is the third way?  It’s realizing that while we do need to shrink government, its not about just cutting monetary outflows.  It’s about cutting the money that’s printed and then put into consumption.  We need to be investing in projects that will actually net a positive return.  We don’t need more consumption.  We need infrastructure, investment in new technologies and education.  We don’t need spending, pork projects and transfer payments.  We need high speed Internet everywhere.  We need better transportation. Better schools.

The cuts come in spending cuts, while we increase investment. We need a new roof on our house, not a trip to the Carribbean.  Spending on consumption won’t work.  Draconian cuts won’t work.  It has to be investment. The only way it happens is if we demand it. We have to start now. We have a 7-10 year window to really get started and give it our best shot.

  • Dan Gordon

    Investing in technology won’t happen unless we have an enemy.  The emergence of the United States as a manufacturing power house in the 1950s was a direct result of government spending in WWII (and the stimulus we gave to Europe in the Marshall Plan).  The scientific innovations of the 1960s again only occurred because of a space race with the Soviet Union.  Unfortunately due to the nature of politics in a democratic republic, long-term investment in science and infrastructure is just not a powerful enough platform for most career politicians.  Without some sort of existential threat to strike fear in the heart of the American people, politicians have an easier time campaigning on issues like gay marriage and taxes.

    • http://www.nathanlustig.com Nathan Lustig

      Very interesting points, I hadn’t thought of it that way.  To add, the interstate system came out of WWII and being impressed with the german autobahn.

      We’re set up for an “us against the world” race if someone wanted to motivate the US population, sort of like Kennedy “we will be on the moon by the end of the decade.”  Foreign oil and the middle east.  Manufacturing/tech and China.  We could do it.

      I don’t like the idea of having to have an enemy for us to do good things, but your comment does make some good sense!

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