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We are starting to see the pundits and economists proposing multiple different solutions to the current slump and slow recovery. Each has his own thoughts as to where future growth can be encouraged. This morning two new articles appeared which have opposing solutions to the problem.
The first article was by James Pethokoukis, who has been writing on economic issues for years. He is questioning the current decline of the dollar, but notes that this phenomenon has competing interpretations as he writes:
Thus the falling dollar should rightly be interpreted as a sign of “new economic optimism,” argues JPMorgan Chase economist Jim Glassman.
Then again, perhaps future economic historians will look back at this stage of the dollar’s decline as the currency calm before the storm. Because at some point, investors may suddenly realize that America’s already somewhat devalued currency should not be trusted.
The main point he tries to make is a strong argument against additional deficit spending. He goes so far as to note:
Two examples — one ridiculously expensive, one just ridiculous. But both reveal a nation completely unwilling to deal with current trillion-dollar deficits or long-term shortfalls many multiples of that number.
What confidence should dollar investors have that America will really cut entitlement spending? Very little. Instead, we are more likely to see huge tax increases that could cripple productivity, or further dollar neglect, or a central bank that turns dovish on inflation. Or perhaps all three.
It’s an argument others have made, but James notes some current policy actions which he feels make the situation more critical and he's definitely no supporter of the "new economic optimism" of the investment banks. For him, any solution must start with the government putting its support behind the US dollar and cutting back on the endless deficits.
However, not all writers agree. Robert Borosage, who is the president of the Institute for America's Future, writes his own article for the Huffington Post (republished at Real Clear Politics) and argues that:
Fundamental changes are needed. Trickle down should be supplanted by public investment led growth - large scale public investments in areas vital to our future like infrastructure, research and development, education and training. These investments should be deficit funded until the economy actually starts putting people back to work,
Two different views and two different solutions, although both note some of the same issues. Robert puts it best at the start of his article when he notes:
The current account deficit is down as Americans have cut back spending. But the deficit with China is hitting new records; companies are still shipping manufacturing jobs over there. The dollar is down, but not against the Chinese currency. Forget about Federal Reserve Chair Ben Bernanke who warns against going back to the unsustainable trade imbalances that led us over the cliff. The old patterns are coming back.
Bernanke has announced that the recession is over, the recovery has begun. But to date, we are looking at a reversion, not a recovery. We've stopped the free fall, but we haven't changed direction.
Both see the dangers and the lack of a strong recovery. And interestingly both make the clear charge that the consumer driven economy of the last three decades has failed. The only question will be what solution might insure that economic growth resumes. There we have two different solutions with James clearly arguing against deficit spending while Robert wants deficit funded public investment to restart growth. I've argued that the public investment theory has proven to be less than compelling, especially as it is a clear Keynesian solution and I have strong reservations against his assumptions. However, I cannot say that the solution of James Pethekoukis would be any more successful in our current economic crisis. I can say that its unlikely that either solution will be fully employed. We will have to wait and see if either proves to have the right idea on how to get the economy going again.
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