It's been a while since my last
Ramble, but it's not for a lack of things to write about! Just been busy with vacations and getting a dissertation written...
Anyway, as we're right between the two big conventions, and as the election campaigns ramp up for their final onslaught, I wanted to write a quick post about what I think are the four most important things to remember about the economy. If our elected officials could understand and remember these four things, we'd be in pretty darn good shape. Here you go:
1.
Economic growth solves (almost) everything. Budget deficits, unemployment, poverty, social security...all of them would be much less of an issue if we could get the economy to consistently grow at a decent rate (like, say 2-4%). What does it really mean for the economy to grow? It means that we are producing more with the resources that we have.
2.
The President can't do that much to affect economic growth. Don't get me wrong here, the government is certainly the most important single player in the economy, but in reality the president himself can't really affect things very much. So, don't let Romney convince you that our poor economy is all Obama's fault. Don't let Obama convince you that our poor economy is all Bush's fault. Don't let Romney convince you that he can turn the economy around single-handedly. Don't let Obama convince you that the improvements we have seen in the economy over the past couple of years are due to his policies. Instead, imagine the U.S. economy as a very large, heavy container ship. The president is very small tugboat. Can the president make a difference? Yes, but it's small. What really matters for the direction of that big boat is its engine, its rudder, and Mother Nature.
3.
Innovation drives economic growth. Okay, so economic growth matters. How do we get the economy growing? One thing that pretty much all economists agree on is that it is innovation that creates real growth. New inventions, new technologies, or new combinations of old technologies are what drive our economy forward. So, what the president
can do to have a real impact is focus on policies that create rich environments for innovation. To me, that means we need a president who will: (1) Improve education (including retraining programs for people looking to switch careers): someday I'll write a blog post completely about education. I promise. (2) Loosen up immigration: there is strong evidence that highly-skilled immigrants who come to the U.S. innovate and invent at extremely high rates. And yet many of them are only able to stay here for college and then are forced to leave. Why aren't we giving these people visas? (3) Reduce taxes on businesses: corporate taxes discourage businesses from creating profits in the U.S. Why on earth would want to do that? Raise taxes elsewhere to compensate, but we should reduce corporate tax rates (to zero, in my opinion). (4) Incentivize innovation: I probably need to write another blog post on this one, but the basic idea is the government can do a lot to help ideas transition into actual businesses.
4.
The president needs to have a long-run focus, but probably doesn't. Suppose there was a nation where everyone earned $50,000 per year. The President of this nation had a choice between two policies. Policy 1 would cut everyone's income in half today to $25,000 per year, but would guarantee 3% real economic growth for the next 100 years. Policy 2 would maintain everyone's income today, but economic growth would only be 1% for the next 100 years. Which is the right choice? It's a tough call for sure. Income under policy 1 would be less than that of policy 2 for 37 very long years. But, by the end of the 100 years, income under policy 1 would be $466,000 per person, whereas under policy 2 it would only be $134,000! Clearly, policy 1 is the best choice. But can you imagine cutting your standard of living in half in that first year? Can you imagine a president (or an elected official) making that choice? No! They'd be ridiculed in the press, lampooned by everyone, and never re-elected. Now, do real presidents face decision such as this? To a certain extent, yes, they do. I think that Obama faced exactly this kind of situation right after he was elected. He essentially had a blank check to write a very large stimulus bill and use it as he saw fit. He had two options: (1) Spend the money on "shovel ready" project to create jobs now or (2) spend the money on programs that would foster innovation in the long run, such as better education or immigration programs, or using it as seed capital for great ideas that were struggling to make it to market. He chose option 1 for the most part, and I feel like that was the wrong choice. Now, I want to be extremely clear: I think a republican president would have done the same thing, so I'm not necessarily trying to throw Obama under the bus for this. I just think it's a clear example of a president choosing something that creates a short-term bump but has little effect in the long-run. So, anytime I see an elected official trying to make a smart long-run choice, I immediately like them a lot more, and they're likely to get my vote. So, watch for that this fall.
Okay, there you have it. My four big points. What have I missed? Anything in particular that you want me to blog about with regards to economics and the elections?
