Whatever happened to the liberal agenda?

With unemployment hovering near the 10% rate, liberals are once again calling for a massive stimulus package. This type of policy making indicates a near certainty that the liberals are going to lose the rest of their political capital. Recall that the liberals had won a huge political mandate in the elections for US President and the US Congress in November 2008. But by the end of 2008, they had already done serious damage to the liberal agenda by letting the financial crisis spill over into a world-wide economic crisis. The three main mistakes they made were (i) to make an unqualified endorsement of the Federal Reserve's reckless monetary policy, (ii) to unnecessarily call for nationalizing the banks, (iii) to scare the world into believing that if consumption in America collapses then the emerging market economies could not sustain rapid economic growth. The liberals greatly amplified these three mistakes by making an organized promotion of Great Depression mania.

At present, the liberals are saying that the first stimulus package, worth $787-billion, is too small, and that they are leaving themselves open to criticism from the Republicans on this count. The Republicans are indeed saying that the stimulus bill is not stimulating anything, that hardly any money has been spent so far, even though it has been six months since the stimulus bill was enacted. A few weeks ago, Professor Paul Krugman appeared with Professor John Taylor for a 16-minute debate on Fareed Zakaria's GPS show on CNN. Zakaria asked, "What's wrong with the argument that if what you're trying to do is create rapid increase in purchasing power, that tax cut, permanent tax cut would actually deliver it faster?" Professor Krugman's reply: "... ... You can't have a ratchet where you always cut taxes and never raise them. Eventually, we end up with no government at all, which is, I guess, some people's goal. But, we can't have that".

At first, I couldn't believe that a renowned economist like Professor Krugman would make such a lame argument, after eight years of having the opportunity to criticize the Bush tax cuts. But, then I realized that Professor Krugman would make the same argument even if he had to answer the question all over again, at his own leisure. Basically, the problem is that the Western liberal tradition has been hijacked by the labor union movement. In an ideal world, Professor Krugman would have instead explained that in the modern economy, human capital is the most important form of capital. So, if the ultimate purpose was economic recovery, it would not be so effective to quickly enact a permanent tax cut and hand over all the money to the wealthiest people.

How about the permanent middle class tax cut (Making Work Pay) that Professor John Taylor was proposing in the debate? Would it be a good idea to quickly disburse the whole stimulus bill in this form of a permanent middle class tax cut, with the aim of creating "rapid increase in purchasing power"?

Well, the modern economy is constantly changing its structure. People feel the need to constantly learn new skills to keep themselves employed. In a severe downturn, many millions find themselves laid off from work. These millions are all engaged in a serious effort to update their skill-sets so that they can make themselves valuable in the job market. This is why it is important to back-load most of the stimulus spending to 2010, so that (i) the various government organizations get enough time to take into account, the changing structure of the economy, when they devise new spending programs, (ii) the people looking for employment get enough time to develop the skills that the market wants. A payroll tax cut only helps the saving and consumption behavior of those who are already employed. It does not facilitate the re-structuring of the economy, nor does it help directly in the learning process that people are going through to update their skills.

Another important point to note is that making the stimulus spending slow and steady provides a strong insurance against the economy going out of control into another free-fall. A massive one-time spending would have instead increased fears that once the spending loses its strength, the economy would go into another free-fall. Recall that when President Obama was sworn in this January, the liberals were claiming that if the stimulus bill is not massive enough to their liking, then it would not deliver an economic recovery. In two articles I had written in March (here and here), I had explained that not even Keynesian theory would provide a theoretical justification for a massive one-time stimulus spending. Moreover, one should not forget that recent developments in economic theory, that combined insights from Keynesian theory and business cycle theory, promised to make recessions mild, if not bypass them altogether. So, it would be prudent to admit that in the state that economic theory is currently in, it could not provide reliable guidance through the current economic crisis that has been surprisingly so strong and so devastating.

Next, we consider the unemployment problem. In its last FOMC meeting on June 23 - 24, (the minutes of which were released yesterday), the Fed had significantly raised its projections for GDP and inflation, but dropped the projections for unemployment for the remainder of 2009 to a range of 9.8 to 10.1% from the earlier projection of 9.2 to 9.6%. In the last few days, the Fed Chairman has also expressed concerns about a job-less recovery, which brought back memories of the George W. Bush presidency. Here again, the liberals are betraying their inability to free themselves from the labor movement's powerful hold. Unless the liberals give equal importance to globalization as they do to the issues of domestic labor, they run serious risks of bankrupting the American economy in the name of avoiding President Bush's job-less recovery from earlier in this decade.

With President Obama's unprecedented popularity around the world, it has become much safer for Americans to work around the world (except in the geo-politically high-risk regions). It would be possible to negotiate agreements with foreign governments to guarantee the safety of Americans working in their countries. Millions of Americans can find employment around the world as teachers of the English language, as business and political consultants, as sports coaches, as media personnel, and in so many other avenues of employment. It does not seem unreasonable to expect that in ten years time, 10 - 12 million Americans can be gainfully employed abroad. China alone could provide 3 to 5 million jobs for Americans. There is now a huge craze for American goods among the newly affluent Chinese consumers -- blockbuster movies from Hollywood, American food, fashion clothing, etc. There is really no serious argument for a second stimulus package running in the hundreds of billions of dollars.