Innovating Toward Fiscal Solvency

June 24, 2011

Now that Weinergate is finally behind us, Capitol Hill can affix its attention on the most pressing issue facing our economy.  Unfortunately, instead of worrying about structural unemployment, which is the most critical obstacle facing our nation right now, Members of Congress have turned their attention to our national debt and annual deficit.

The national debt is certainly something the country needs to concentrate on in the long-term, as the events in Greece so vividly illustrate, but it will be next to impossible unless we get our economy heading in the right direction.  Recent economic figures, predominately revolving around manufacturing and payrolls, have lagged in the last few months.  Despite the best efforts of the Federal Reserve, including a near-zero interest rate and two rounds of quantitative easing, the country is still in need of a legislative boost.

These points are reinforced by some of our country’s leading economic minds.  Bill Gross, founder of PIMCO and one of the world’s leading financiers, wrote a thought provoking letter to his investors discussing steps the Federal government and our nation’s education system need to address in order to stimulate American innovation, and subsequently growth.  Gross contends:

Solutions from policymakers on the right or left, however, seem focused almost exclusively on rectifying or reducing our budget deficit as a panacea. While Democrats favor tax increases and mild adjustments to entitlements, Republicans pound the table for trillions of dollars of spending cuts and an axing of Obamacare. Both, however, somewhat mystifyingly, believe that balancing the budget will magically produce 20 million jobs over the next 10 years.

Gross continues by noting “The move towards [a balanced budget], in fact, if implemented too quickly, could stultify economic growth.”  Ben Bernanke, Chairman of the Federal Reserve, reiterated Gross’ thoughts by noting:

I don’t think that sharp, immediate cuts in the deficit would create more jobs. I think in the short run that we’re seeing already a certain amount of fiscal drag coming from state and local governments from the withdrawal of previous federal stimulus, so I think in the short run, you know, the fiscal tightening is at best neutral and probably somewhat negative for job creation.

In addition, in his 14 suggestions to stimulate growth in the U.S. economy, former President Bill Clinton stressed investments the Federal government can make, not cuts or tax increases.  But despite warnings from leading figures of our lagging economic recovery, the discussion on Capitol Hill invariably reverts to short-term deficit reduction.

Despite the failed attempts of elected officials and now aspiring Republican Presidential contenders to convince the public otherwise, anti-Keynesian policies, such as government cuts or tax increases, will not do anything to stimulate the economy.  If anything they can have the opposite effect.  Don’t believe me?  Look at how growth in the U.K. stalled after austerity measures were enacted last year.  Want a U.S. example?  Study government fiscal policy during the Great Depression, particularly from 1929-32 and again in 1936-37.

A Member of Congress looking to have their name resonate in history will be best remembered not from cutting, but spurring economic vitality.  President Kennedy is revered for setting America on a mission toward the moon.   Considering our structural economic challenges, it will take forward, courageous thinking to spark the necessary innovation to significantly raise GDP.  The elected official willing to take a chance and deliver a brazen new plan to jumpstart America’s economy, instead of cutting it, will grab the headlines and truly reduce our national debt in the long-term.