Political Dysfunction at Root of U.S. Economic Malaise

U.S. Economy: Standing on the Brink

Lately, the economy is looking pretty good.  Unemployment is declining, wages are rising, consumer spending is up.  Things are going so well, the Federal Reserve Bank is poised to start raising interest rates.

What’s not to like?

Well, quite a bit, actually.  As was pointed out in a previous article in this series, the long term trend is ugly.  Economic growth since 2000 has averaged less than 2%, compared to growth rates of 3% to 4% in the 1950’s through the 1990’s.

Now, a 1% to 2% decline in economic growth may not sound like a lot, but it represents millions of jobs and the difference between rising standards of living and stagnant wages for millions of Americans.

There has been a lot of debate about the causes.  Bad trade deals; the decline of unions; failure to raise the minimum wage.  And yes, we can (and should) reject the Trans Pacific Partnership (TPP), fight back against efforts to eviscerate worker bargaining rights and raise the minimum wage to $15 an hour.

All are good and worthwhile initiatives. But they are a little like the well-meaning family doctor who treats the symptoms of a major disease, but doesn’t think to look for the root cause.  Meanwhile, the patient winds up clinging to life in a hospital bed.

A slight upward blip in employment and spending doesn’t alter the fundamental trend – the U.S. economy is seriously ill and we need to find a cure, not just treat the symptoms.

Enter the Federal Reserve.  The Fed pumps money into the economy and holds down interest rates, and the patient actually shows a slight improvement.  But that simply masks an underlying disease that continues to worsen.

Fed policies – aggressive bond buying coupled with low interest rates – probably saved the U.S. economy from falling off a cliff following the Great Recession of 2008.  But monetary policy has run its course.  Continued reliance on the Fed alone has only served to over-inflate asset values, drag down productivity and exacerbate income equality.

What’s lacking is “fiscal stimulus” – or, in other words, budget measures to spur economic growth and productivity.  Such policies might include increased Federal investment and tax incentives to stimulate investment at all levels of government and in the private sector.

Uh oh – that would require action by Congress!  The cold, hard truth is that Congress is so dysfunctional it can’t pass a budget on time, let alone come up with a coherent fiscal policy in the face of persistently slow economic growth.  And since the Fed is effectively out of ammunition, the next recession could be far worse, and last far longer, than the last one.

What can we do about it?

Well, for one thing, Democrats must be more aggressive in challenging Republican orthodoxy that tax cuts (mainly for the rich) actually stimulate economic growth, and all government spending and taxation are inherently evil.

In fact, spending on infrastructure is not spending at all in the traditional sense– it’s investment in future growth.  And It is almost unthinkable that with the economy sputtering, and interest rates near zero, that the government is not borrowing aggressively to rebuild this country’s crumbling infrastructure.  Such policies would create millions of good paying jobs, lift wages and reduce income inequality.

And while we are at it, let’s not forget we need to invest in people, to ensure the next generation is well educated, productive and poised for the jobs of the future in areas such as clean energy and technology.

Far too much money in this country is sitting on the sidelines, or being paid back to stockholders in the form of buybacks and dividends.  We need tax policies that actually spur investment to upgrade plant and equipment, not reward people who churn paper for a living or companies that stash their profits overseas to avoid taxes.

We also need a fairer and more progressive tax system.  Taxing capital gains at a much lower rate than wages and other earned income (21% top rate for capital gains v. 39.6% for earned income) is the very definition of a rigged system that favors the rich over the poor and middle classes.   Donald Trump should know; he is one of the main beneficiaries of that rigged system.

It is past time that capital gains tax rates were raised just to restore some measure of fairness into a system that has become heavily tilted in favor of wealthy (e.g. those who derive most of their income from assets) at the expense of working men and women.

These are reforms that won’t happen overnight.  Entrenched interests, in particular the financial services industry, are formidable opponents with deep pockets who exercise out-sized political influence behind the scenes.  Meaningful reforms will take time, and will require a level of effort and political will that has been absent in recent decades.

Bernie is right – it will take a political revolution.  But It’s a revolution that needs to come sooner rather than later before political dysfunction turns what amounts to an economic slowdown into another major recession.

This is the third article in a four-part series “Fix the Economy, Stupid.”