Pete made a very important point about how public relations is about spin and not public relationships. I’m going to be cynical and say that politics for the most part has become largely about PR, with all sides believing that if only they could control the message and do what they want, then things would be OK.
The problem is that now, more than ever, the “right” thing to do is different depending on what our country’s strategy will be. In the comment section of that thread Marlowecan asked a question about raising taxes in order to try and pay down our debt, and my reply was convoluted because the answer depends on strategic objectives that our country hasn’t decided upon.
Here is the problem in brief:
We all know that our country has too much debt. This is a result of major trade imbalances where we consume much more than we produce and have been running large deficits. Most of the developed world is the same, but the major creditor nations are China, Japan, Germany and the oil producing states. As long as the trade imbalances remain, the global economic crisis will get worse because debt burden will get worse. Thus, the long term solution is to re-balance trade, which means a combination of debtor nations having exports rise much faster than import consumption and/or the creditor nations having much faster growth in imports than exports. This is well agreed upon by economists but the question is how and there is no “right” answer.
If consumption drops too rapidly in the United States, we will face a deflationary spiral and a depression like environment. Our creditor nations would also suffer because their exports would plummet and they don’t have enough domestic demand to run the economy. On the other hand, it will quickly help towards rebalancing trade and create an environment where we theoretically could start work on paying debt back if there were proper policies over the next decade or two.
If consumption is maintained through domestic stimulus, but most of it goes towards buying imports, then neither side suffers in the immediate term, but it will quickly create such a massive amount of debt that there is no way that we can pay it off and this would cause a currency crisis. The dollar would plummet and cause massive inflation in imports, with simultaneous demand destruction domestically, and this could lead to a Weimar Republic/Iceland like scenario where the country is permanently bankrupt.
In order to try and avoid a deflationary environment and a currency crisis, there is a proposal for massive simultaneous stimulus that is properly balanced. I can tell you the third option is what leaders are going to attempt to do, but that requires a massive shift in all the countries import/export economy and is extremely difficult to implement. Moreover, it guarantees that the creditor nations will become poorer as they transition and that’s not something they want. If we try this third way, but all the countries involved can’t (or won’t — which Germany and now China have policies that are counterproductive towards this goal) re-balance quickly, then it will look like the second option and lead to currency collapse.
The fourth option is to think that the entire crisis is overblown and therefore if we just do normal procedures everything will kickstart and we will have many years to change the trade imbalances. This fourth option is a combination of letting deflationary pressures form and also stimulating, and its strength is that if things aren’t bad then they will correct instead of being pushed into guaranteeing massive changes, while the con is that if things are bad then it is a crap shoot between a deflationary depression or currency collapse. The fourth is what we are currently doing although it’s not an explicit strategy and more just a lack of one. The primary problem with this is that if you believe we have a major crisis then at least with the first few options there is a way for the populace to prepare. With this option, it is impossible to know what is going to happen and is partially why there is so much volatility. The volatility in itself is worsening the financial structure and is increasing the chances of a major move that will happen faster than we can react. Everyone pays attention to the stock market, which is used to volatility (although we are seeing the highest volatility ever, including during the Depression) but the bond and currency markets are also seeing record volatility and these can not handle it.
If we pick option 1 then we need massive new social safety nets that are designed to help tens of millions of people that lose jobs survive, and reintegrate those that can be into a new industrial economy. Then the question for success is whether we can create that new economy quickly or whether it will take too long and political pressures erupt. Option 2 isn’t really viable because it assumes a major problem and just closing our eyes. Option 3 is theoretically the best if it can be pulled off, and means that we should look into stimulating everything but carefully. But is also the most political (international and domestic) and the consequences are like #2, so then the question becomes whether you think it’s realistic. If we are going for option 4, the key is to state that the problems aren’t that bad and lay down ground moderate aims and ground rules for interventions, as reducing volatility is key to success. Option 4 is what many people felt was the closest to how things should be approached, but are quickly changing their tune. I always believed that we do have an epic crisis and have the numbers (and many massive posts on this site) to support it. Your mileage may vary.
So the answer to Marlowecan’s question about taxes is it depends what strategy the government is going to implement. If it is trying to stimulate (options 2, 3, 4) then a tax cut (oops I meant increase) is an awful idea because it will lead to a decrease in consumption. If the government embraces a decrease in consumption and decides to forget about trying to save the economy as it’s currently structured, then it might make sense.
The same goes for the auto bailout. The same goes for the financial bailout. The same goes for unemployment insurance. The same….etc.
These are not questions of economics or ideology, it is more a question of leadership. All our leaders have been reduced to pundits trying to “save” the populace from misery by assuming what people will want, not by making a concerted effort to develop something we (and the world) can work towards together. [Even if that concerted effort was in maintaining status quo and not worrying.] Obviously the answer about which strategy should be implemented will vary a lot on the person but it’s a discussion that needs to happen as it will set the tone for each individual move. Without that it’s difficult to be for or against any particular action and we’re just relying on luck.