Stoid:
Economics is a balancing act. What makes an economy strong is liquidity. Please note the caps. It’s very important.
In laymen’s terms, liquidity is the amount of money turning over in an economy. Think of it another way: How much cash is getting spent? That’s liquidity.
Liquidity is like love. The more you give, the more you get. All the dollars that get spent buy goods and services that put money in new pockets which in turn buy goods and services, and so on and so on. Spending makes goods and services in demand and means more money, more liquidity.
Now, there are times when you can get a runaway economy. People are too confident. There’s too much spending. Sometimes you see inflation. Certain goods and services get severely and unrealistically overpriced.
To contract an economy that’s booming too much, the Federal Reserve arm of the government will take on a “tightening” stance. They’ll increase interest rates, and pull money out of the economy, decreasing liquidity in an attempt to put the breaks on the runaway train.
Right now we are on the other end of the cycle. People don’t want to spend. The economy is contracting not growing. People are uncertain about the future and less willing to take on debt and spend. They’re concerned about their jobs.
If liquidity is like love, then recession is like hate. The more you give, the more that comes back on you. If people are unwilling to spend, goods and services are not in demand. The people that supply those goods and services face a crunch since nobody’s buying their stuff. They in turn become afraid to spend, and the effect builds like a pert commercial. Everybody’s afraid to spend because they think things are going to get bad, and the more they are afraid to spend the worse things get.
In response to this, the Federal Reserve tries to get people to spend by “easing.” They lower interest rates and make it easier to borrow money in order to encourage people to spend. They inject more liquidity into the markets, and encourage banks to follow suit, called “moral-suasion.”
There are some other tactics which I’ll get into in a minute, but at this point I should state that the goal of all this Federal policy is to moderate the boom phases of the economy and mitigate the bust phases. When they do this succesfully, and slow the economy without crashing it like they did (or at least take credit for in '94) it’s called a “soft landing.”
We were on our way to another soft landing before the WTC disaster. “Soft” is of course a relative term. Chances are that this cycle would have been worse than what we went through in 1994, but probably not a serious recession.
Current economic events though, as well as the WTC incident have put some serious brakes on the economy. It now appears that a serious recession is likely.
Remember, you slow an overheated economy by decreasing liquidity, and you revitalize a recessionary economy by increasing it.
But, how do you do the latter?
The most important ingredient is getting the consumer to spend money. Remember, consumer purchases have a cascading beneficial effect on the economy.
So, if a government is doing a good job, fiscally speaking, it should be in a surplus spending mode during boom phases to slow the economy, and deficit spending mode in bust phases to help it along.
The military build up will ensure that the government does a lot of spending in the near future. Bushes argument, which makes sense, is that the end is all taken care of.
However, there are two problems with government spending. Economically, the government is not a great consumer. A large portion of money spent by the government does not increase liquidity, it just disapears into a black hole. (take my word for it for now, I’ll be glad to explain if you want to know why this is true.) The fact that military purchases benefit the industrial economy mitigates this effect in this particular case though.
However, the other end of the equation needs to be taken care of as well, and that’s the consumer. Military spending will give a boost to those who are connected directly and indirectly to the military industries, but it’s not near enough to forestall a recession, and it takes time to filter through.
Somehow you have to encourage the consumer to be more confident, stop saving so much, stop paying down debt. You need an aggressive and confident consumer out there, and he needs money in his pocket and the will to spend it if the economy is going to get back on it’s feet.
A way to do this is to make borrowing easier, another way is to lower taxes.
So, while it seems counterintuitive, we need the government to go into deficit spending to help the economy get back on it’s feet. It does this by easing interest rates, spending more and lowering taxes.
Fortunately, the government is in a very good position to do this right now.
While I will happily bash Clinton for any number of things, he was a fiscal conservative. While times were good he did not increase spending irresponsibly and in fact actually reduced that rate at which the Federal Government was growing.
That leaves the Federal Government fiscally strong and able to do what is necessary to help get us out of this. When it works (so far the economy has always responded to fiscal easing) Bush is going to get credit that rightly belongs to Clinton.
That’s Ok, though, because Clinton got some credit that belonged to Bush Sr. from the last cycle. You’ll recall that the slowing economy was blamed for some of the dissatisfaction with Bush Sr. The fact is he did a good job engineering the soft landing.
Going a step further, none of these guys really deserve too much credit as all they did was listen to some smart people like Greenspan.
Hopefully, you see why lowering taxes and increasing spending is the responsible and correct thing for a government to do during a recessionary environment.
Finally, it is Monopoly money. The dollar has no inherent value except as a measure of barter that people assign to it, more or less arbitrarily. The Dollar is fiat money. That means it’s backed by nothing except people’s willingness to believe in it, their “confidence” in it as a source of liquidity.
That’s all that seperates it from Monopoly money. Really. That’s it.
The Fed’s job is to contract and ease, go with surplus or deficit as circumstances call for it.
So, in a recessionary environment tax-cuts and spending are the best thing for the nation.
You really can’t shellack Bush for endorsing this responsible path, but you can’t really give him credit either, as it’s not really his idea.