Sunday, February 19, 2012

… illiteracy is killing the economy

By kay.e.strong

...that is, economic illiteracy!  If ever you were looking for a leverage point to improve the economy, then bagging bad politics (along with the politicians) would do it! 

“The polarized rhetoric of the 2012 election cycle presents voters with a false choice of whether the government can create jobs or should just get out of the way.” (NYT: How Not to Revive an Economy by Michael Grabell, 11 Feb 2012)

Amen to that!

Politic is not economics.  Their goals differ.  Politics is and has always been about maximizing the voice of the few at the expense of the majority. And I get it.  The voice of a minority is important.  It rounds out national discussion by offering a counter perspective that tempers the lunacy of the majority.  What if the minority voices had been heard, would the moral depravity of Hitler’s regime have reached 6 million Jewish lives?  

On the other hand, economics is about maximizing the well-being of the majority at the expense of the minority. This is where politics steps into to mitigate minority losses. In Measuring the Costs of Protection in the United States, Hufbauer and Elliot report: Still, the annual consumer costs per American job "saved" by "special" protection range from $100,000 to over $1 million and average $170,000. Consumers thus pay over six times the average annual compensation of manufacturing workers to preserve each job. In terms of net national welfare, the cost per protected job is about $54,000.

Political rhetoric kills.  Government and markets are the twin pillars of a healthy economy.  Good governance matters!  It explains large differences in the performance of economies. The nation of Zimbabwe celebrated the December to January drop in inflation from 4.9% to 4.3%.  This is a huge deal given that Zimbabwe has experienced inflation rates as high as 11.2 million percent!  Yes, 11.2 million percent requiring a single Zimbabwe dollar denominated as 1 trillion ZWR!  The Japanese, on the other hand, struggle with the opposite problem.  Deflation, negative growth rates of prices levels, has plagued the Japanese for more than a decade making it nearly impossible to rev the economic engine.  

Unemployment-wise, the rate in the troubled euro zone stood at 10.3% comparable to the US in October.  The German economy faired better than average with rate of 5.5%. The Greek economy has reached +18% with more austerity measures in the works. Throughout the eurozone youth unemployment rates range from 24% (France), 45% (Greece) to 49% (Spain). Athenian youth recently took to the streets in a “burn, baby, burn” rampage reminiscent of Detroit riots of the 1960s.  In Japan, employment figures conceal the second-class status of Japanese youth where 45% hold irregular jobs, up from 17.2 percent in 1988 and double the rate of older workers.

Rather than pitting government against the market, “[t]he real debate should be about which policies work and which don’t.” Score, Mr. Grabell, two points on this pop quiz!  So what doesn’t work:  more austerity on top of austerity [think, Greece], stimulus money directed at deep infrastructural projects like roads [think, US], or institutional policies such as underfunded pension plans which discourages older worker turnover [think, Japan].

Economic growth is a long-run phenomenon; unemployment is a by-product of short run economic fluctuations. What we need is a Stimulus 2.0 package that marries both ends of the stick, simultaneously. That is, policies that lay the ground work for long-run growth, while stimulating short-run demand. So here’s my top economic policy picks.

1. Reinvest in Americans not America.  Make post-secondary education affordable by subsidizing its cost for any American willing to take on the challenge…and political whiners get a passport free-of-charge out of the country!  

2. Eliminate the outrageous 8.5% interest rate being charged to American youths who have invested in higher education on their own dime.  For heaven-sakes, the fed funds rate is only 0.25% on a bad day! Redirect those “shovel ready” dollars from roads to absorbing interest payments for America's future workers!

3. Open the doors to educated youth worldwide to seek “unemployment refugee” status in the US. Immigration as a trigger for economic growth is well-documented. The Kauffman Foundation characterizes foreign-born entrepreneurs as an underestimated American resource!  The report states that “… in a quarter of the U.S. science and technology companies founded from 1995 to 2005, the chief executive or lead technologist was foreign-born. In 2005, these companies generated $52 billion in revenue and employed 450,000 workers.” Tell me, we couldn't use the brain-power! [Source: http://www.kauffman.org/entrepreneurship/foreign-born-entrepreneurs.aspx ]

Mr. Grabell—who’s probably neither an economist nor a politician—got it right: “… there are areas where the government should get out of the away, by clearing bureaucratic hurdles. But it’s equally important for politics to get out of the way of smart government policies....”.

Kay Strong, Ph.D., Southern Illinois University, M.T., University of Houston, M.A., Ohio University; Associate Professor at Baldwin-Wallace College; Areas of expertise: international economics, contemporary social-economic issues, complexity and futures-based perspectives in economics. E-mail: kstrong@bw.edu

8 comments:

  1. Great points... but perhaps the most important investment is primary education, so we can develop a trained and educated society and workforce from the beginning....this would include stronger inner city programs; and not to be overlooked would be trade schools later on.

    ReplyDelete
  2. Definitely, an option for spurring long-run growth...in fact, pre-K education provides an extraordinary ROI. A. Rolnick (Minneapolis Federal Reserve Bank) and others argue that, "instead of being seen strictly as an educational intervention, preschool should be viewed as an economic development investment—one that significantly outperforms more traditional investments in business and job creation." [See: Power of Preschool] While great choice for immediate investment, be reminded that the ultimate pay-off runs 3 to 4 decades out.
    A quicker-fix requires supporting tool-ready quality resources that stimulate demand in the present(thus, mitigating the short-run decline in aggregate demand), while building future capacity for the economy (long-run economic growth).

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This blog lives under the auspices of the Department of Economics whose mission has been to hold high the lantern beaming an "economic way of thinking" onto the world. Selfishness, rationality and equilibrium have been central to the teaching of an economic way of thinking rooted in the Renaissance. And, in this regard, the department has faithfully stayed the course. The intent of this blog, thinking out loud..., however, is to entertain exchanges which may challenge the centrality of economics as we teach it.