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Who's right on the economy: Republicans or Democrats

I’ve been a lifetime conservative (although my life has been relatively short thus far – I’m only 25). My conservative principles tell me that the GOP is doing the right thing in their concentration on budget deficits, spending, and lowering taxes.

The academia I have learned (including the CFA curriculum) tells me that in recessions, inflation and deficit fears have to be put on hold as the government has to ramp up spending to make up for lost demand from the private sector.

I think the academia may not totally apply here because of America’s unique role as the world’s reserve currency and its treasuries as the default risk free rate–something that the text may not take into consideration. So not sure how this affects the argument.

Basically, I am admitting I don’t know yet where I stand on this topic and I just want to know what everyone on here thinks. This is the most polarizing issue in the country right now. All politics aside, what does everyone here think is the correct course of action for our nation’s economy given both our short term and long term issues?

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First, I think this is a great question and I hope it stimulates some thoughtful and constructive conversation on this forum.

While I don’t disagree with your assertion in the first paragraph that GOP is doing the “right thing” concentrating on deficit and spending, I also think these are key issues for the Democrats as well. Basically, to me, these are unambiguously important issues no matter what side of the political spectrum you’re on.

Regarding your second paragraph, the matter of HOW to pull the country out of recession is more debatable. On one hand, I don’t view this as a matter of putting “inflation and deficit fears on hold” – citizens and taxpayers are going to feel how they’re going to feel, though the government has a real influence in these feelings. On the other hand, as citizens, we do have the right to vote for the party that best represents what we believe to be the solution. Therefore, as you think about where you fall on this issue, you may want to ask yourself whether you believe it’s really the government’s role to ramp up their efforts to stimulate the economy, or if you believe fiscal conservatism is the way to go and that the government needs to curb its involvement in the private sector and allow capitalism/free markets to work themselves out.

Neither of them are correct.

The correct thing would be to get rid of all illegal aliens, which would save on costs, as well as open up more jobs to Americans. Then abolish welfare and make those on it take the jobs that the illegals had. Reduce corporate and individual taxes. Severely cut medicare, medicaid and social security. In reducing the tax rates, get rid of half of the deductions that are pointless. The entire tax code should be no more than 5 pages long. Cut public pensions, and raise the retirement age to 68.

That would be a decent start.

I think that Americans have an innate revulsion of inflation due to past experiences, and I think that unfairly colors public opinion of the administration’s actions. I’ve heard a lot of people, mostly older, say that Paul Volcker should be head of the Fed right now due to his record in curbing inflation.

My issue is- inflation is the least of our worries, we are probably more likely to see a deflationary scenario, and our biggest concern has to be to increase economic activity, even at the risk of triggering high inflation.

In other words, how do we increase demand? Devaluing the dollar is an option.

who’s better at basketball: fish or squirrels?

Palantir Wrote:
——————————————————-

>
> My issue is- inflation is the least of our
> worries, we are probably more likely to see a
> deflationary scenario, and our biggest concern has
> to be to increase economic activity, even at the
> risk of triggering high inflation.
>

I agree with this here. Empirically, inflation in and of itself is not necessarily a bad thing for the equity markets and the average investor. During inflationary times, when the economy has seen job creation, U.S. equity markets have risen; however, in states of inflation that are not accompanied by job creation or domestic economic activity, markets have declined.

> In other words, how do we increase demand? Devaluing the dollar is an option.

I’d be interested in hearing more about why you think this. On one hand, I can appreciate the fact that some inflation is good and devaluing the dollar could stimulate more job growth and production in the U.S. (versus outsourcing and exports). On the other hand, devaluing the dollar beyond what I believe has already been a devaluation through QE2 might only divert more capital away from the U.S.

the show NY Wrote:
> The academia I have learned (including the CFA
> curriculum) tells me that in recessions, inflation
> and deficit fears have to be put on hold as the
> government has to ramp up spending to make up for
> lost demand from the private sector.

There is a big difference between structural deficit and cyclical deficit. If on average you make more than you spend (structural surplus) and you are without income for two months (cyclical deficit) because you are switching to a new job that comes with a 50% raise, then it’s ok to borrow money to not have to sell you house, car, etc.

The issue I have with the US government is that it has structural deficit. It spends more than it generates in revenues without expecting to ever pay off debt in the future. Cyclical deficit is ok but structural deficit is deadly.

Thanks for all the replies. I guess my biggest concern/question that I should have written in my first post is that the two opinions from each side of the aisle are so drastically different.

This is really oversimplifying it but generally the right is yelling about tax cuts, less spending, curbing deficits while the left is claiming that we need a temporary tax increase to raise revenues, increase in spending to make up the output gap, and worry about deficits later when we’re not in a recession.

For two views that are so radically different, which view is the more correct direction we should be going in now?

I think less spending was fine, had they been saying it consistently for the past 10 years when the budget deficit balooned. But now when we need more demand, it doesn’t make sense at least to me, to lower that side of the equation…

Short-term, it’s already been decided that the best fiscal response to a sluggish economy is to slash government spending. Whether that makes sense or not I’ll leave up to you.

Long-term, I agree with maratikus that the structural deficit is a problem, and I don’t see anyone in Washington having the cojones to fix it anytime soon. Deficits will continue, the debt will pile up, and the proportion of the budget paid to interest will keep increasing. Everyone wants spending cuts, but there’s a huge NIMBY problem (NIMBY = not in my back yard). My mom is in her late 60s and when she rails against government spending I ask her if she will accept cuts to social security and she says heck no. Any politician who wants to cut the Pentagon budget to stop having America be the world’s policeman will get attacked by the other side as being soft on national security.

The nation needs to get back to surpluses and I think tax increases are going to be necessary. It’s also not happening any time soon. I expect my taxes will go up at some point, and that’s fine, and I’m in favor of any tax increase that I don’t have to pay. For example, I’d love for the estate tax (the death tax!) to go back to where it was.

In short, I have no faith in human behavior, either in the voters or the politicians. As Joey once wrote on this forum, why argue with someone when you can bet against him? So I’m trying to figure out the best way to bet on the stupidity of the US government. Ideas?

Well, the real problem we have is that Entitlements = Social Security + Medicare. And those costs are going up over time as the baby boomers retire and end-of-life care gets more and more expensive. If it weren’t for these costs, the budget would really be quite manageable, even our military spending, which is the next biggest item on the budget.

So when you say that you have to control spending on Entitlements, it sounds like you’re taking money away from people who are bratty and don’t deserve it. But when you talk about taking away Social Security and Medicare, it sounds like you are beating up and mugging little old ladies. Yet it’s really the same issue.

The Tea Party keeps saying that the US has a spending problem, not a revenue problem, but doesn’t seem to want to come out and say, “let’s cut social security and medicare,” which is a third rail in American politics because AARP and seniors are a highly organized voting constituency. So corporations provide the money, and seniors provide the votes. That’s why tax cuts for corporations and no real entitlements cuts are on the way. So what’s left? Well, there’s education, basic research, food stamps, and any kind of unemployment assistance that can be cut “to show that we’re serious about the budget.”

But all of this is just rearranging deck chairs on the Titanic.

You want a quote?  Haven’t I written enough already???

i think there should be more tax-based incentives to get the prvate money off the sidelines. increasing private investment will increase jobs, growth and productivity.

of ‘raising taxes’ and ‘cutting spending,’ neither are the answer, though i favor cutting spending more because i don’t trust politicians to make well thought out decisions.

I see that the never-ending thread has returned…

“Visit the Water Cooler forum on Analyst Forum. It is the best forum.”
- Everyone

Neither, these issues are far too complex and nuanced to be effectively addressed within the constraint of adhering to a particular political ideology.

bchadwick Wrote:
——————————————————-
> Well, the real problem we have is that
> Entitlements = Social Security + Medicare.

is this sentence even coherent? probably it’s a good sample out of a masochists’s wet dreams…

bchadwick Wrote:
——————————————————-
> Well, the real problem we have is that
> Entitlements = Social Security + Medicare. And
> those costs are going up over time as the baby
> boomers retire and end-of-life care gets more and
> more expensive. If it weren’t for these costs,
> the budget would really be quite manageable, even
> our military spending, which is the next biggest
> item on the budget.
>
> The Tea Party keeps saying that the US has a
> spending problem, not a revenue problem, but
> doesn’t seem to want to come out and say, “let’s
> cut social security and medicare,” which is a
> third rail in American politics because AARP and
> seniors are a highly organized voting
> constituency. So corporations provide the money,
> and seniors provide the votes. That’s why tax
> cuts for corporations and no real entitlements
> cuts are on the way. So what’s left? Well,
> there’s education, basic research, food stamps,
> and any kind of unemployment assistance that can
> be cut “to show that we’re serious about the
> budget.”
>
> But all of this is just rearranging deck chairs on
> the Titanic.

Entitlements are the real problem. I agree.

But the republicans came out with a very ambitious plan to cut Medicare. It’s the democrats that are fighting to keep it unchanged.

If entitlements are unchanged, then it really is rearranging deck chairs on the Titanic

Hope. It is the quintessential human delusion, simultaneously the source of your greatest strength, and greatest weakness.

The Republicans also said no to a plan by Obama that pretty much gave the Republicans everything they wanted: http://www.economist.com/blogs/freeexchange/2011/07/america%E2%80%99s-de...

This is not a “look at what the democrats did” or “look at how evil the republicans are” issue. This is simply how this stupid system works. The fact of the matter is that the government is spending way too much. The other fact is that this is not the time to deal with this issue. The economy is very fragile right now and cutting benefits, military spending, subsidies, etc. should be done when we’re on more solid footing.

You can tell neither side is serious about this when you look at the house appropriations bill for the military (HR 2219) and how it’s $17 billion more than it was last year, then you look at NASA and how they want to cut the budget by a lousy $1.6 billion. This is a serious issue but unfortunately the majority of the people in office are clowns.

So to answer the OP’s question regarding who’s right, repubs or dems - the answer is that they are both wrong and they both need to get their act together. Default risk-free does not mean “there’s a 99.9999% chance it won’t default” nor does it mean “we’ll scare you into thinking we may default in order to score political points until the night of the deadline then we’ll agree to whatever crap is on the table because we weren’t ever serious about any of this”.

We do need to make cuts, we do need to raise taxes, and both parties need to compromise. Democracy is not a my-way-or-the-highway system.

Edit: Just wanted to add that when I say cuts need to be made, I mean in everything, e.g., I wouldn’t mind an across the board 10% cut to every single item in the budget. Just not right now.

Edit 2: Stupid spelling.

kant Wrote:
> We do need to make cuts, we do need to raise
> taxes, and both parties need to compromise.

I agree with that. I just hope that overtime spending will be lowered substantially so that taxes wouldn’t have to go up too much.

I recall a political science professor once telling me that politicians don’t matter when it comes to economic growth. Is this true?

I tend to think he was correct. There are some caveats such as the regulatory changes that helped spur the most recent financial crisis but all things considered, I do not believe that the maneuvering of politicians has a meaningful impact to economic growth.

Yes the deficit is a serious issue that needs to be tackled. However, when you already have a sluggish economy that is barely growing how does it make sense to slash spending in the government sector? The reason that we have sluggish growth is cause there isn’t demand in the market. Slashing spending, which amounts to people losing their jobs only worsens this problem and in no way makes it better. It could in serious cases lead to another recession and eventually deflation that ruined Japan in the 90s. In one of Bernanke’s statements about QE or QE2 he mentioned that some fiscal stimulus is necessary but a non-starter in the political climate. The best example of this is the UK where they instituted these ‘spending cuts’ and the economy got worse.

While I mostly agree with Kant above I would disagree with his first edit. I think there are certain sectors that need more investment, and can’t afford a cut. Things such as infrastructure (Europe and China have high-speed rail and we have a joke called Acela, and JFK is THE worst airport in the developed world) and education (including primary, secondary and r&d) There is plenty of waste that can be cut in military spending, subsidies for ethanol and corn farmers (which is not bad economics but also bad for public health).

However none of these matters until the general public wakes up and faces reality. An apt analogy is that America is an overweight person who wants to lose weight, but doesn’t want to go on a diet or exercise. Instead it wants magic pills (like those advertised on TV) that “guarantee” weight loss. But they fail to read the fine print which reads results are only guaranteed with diet and exercise.

1) I disagree that the “real problem” is entitlements … the real problem is the cost of health care. We wouldn’t be having this conversation if the cost of health care entitlements weren’t rocketing into unfathomable territory. Even if we de-entitle health care, those costs will continue to grow and still be borne by someone, either by states or individuals or, in many cases, people just not getting treatment.

2) I also disagree that the Republicans have been concerned with deficits. Republicans have been concerned with taxes, and there’s a huge difference. Every step of the way, no matter the fiscal situation, their solution is always just to cut taxes. That has actually increased the deficit dramatically. The party is transparently fighting for the special interest of the moneyed class. Even if we grant the free-market orthodoxy that they pretend to espouse, their opposition to reforming exemptions, subsidies, and deductions in the tax code proves to me that they’re concerned not with deficits but with the consolidation of wealth.

In short, if I have to choose who’s right I choose the Democrats, not because they’re actually right but because their position is far less scary.

Yea Kmm, I agree with you. Lots of things should be cut much more than others and many things should be expanded. I would love to increase the funding for NASA, DOE, and infrastructure. Unfortunately, that’s not politically feasible for some reason.

recycler Wrote:
——————————————————-
> I recall a political science professor once
> telling me that politicians don’t matter when it
> comes to economic growth. Is this true?
>
> I tend to think he was correct. There are some
> caveats such as the regulatory changes that helped
> spur the most recent financial crisis but all
> things considered, I do not believe that the
> maneuvering of politicians has a meaningful impact
> to economic growth.

Politicians can make a huge difference, because

1) there are so many things that can be done to muck up economic growth, so their decision to make those decisions (often in an attempt to do good, sometimes not) does affect economic growth.

2) corruption, particularly if it works its way into the judiciary, is bad for economic growth in the long term (though, ironically, it can sometimes help in the short term if it helps large projects get approved faster).

3) Certain sectors of the economy are natural monopolies, and the decision to regulate them or not affects the availability of factors of production.

4) The choice to do countercyclical spending or not affects the depth of recessions and the long-term growth path. If you believe economies are perfectly linear systems, then there is no net positive benefit to this in the aggregate. But if you think that severe recessions erode human capital to a greater extent than shorter recessions, then this is a net positive.

5) There is a debate in economics and political science as to whether industrial policy makes sense or not. My take on the historical record is that front-running countries (UK, US) generally don’t do well with industrial policy, but that those which are trying to “catch up” can benefit from it. Virtually all of the BRICs have engaged in some type of industrial policy and are benefiting from it. However, it’s worth noting that industrial policy can create political fiefdoms and “iron triangles” that are ultimately bad for the economy. If the country can implement industrial policy without the creation of such fiefdoms, then industrial policy is often helpful.

6) Sometimes the government is the only organization large enough to amass the capital for certain critical projects like infrastructure. This is usually an issue in emerging markets more than developed ones, although the attempt to rescue the banking system is another example (my take, which is a debatable view, is that it was necessary to attempt to rescue the banking system, but that it should have been rolled into orderly bankruptcies (vs. disorderly, which would have been the “without a rescue” version) rather than banks turned into high-paying zombies).

So, aside from the provision of national defense, rule-of-law, and a few critical infrastructure issues like road networks, education (possibly), and basic research (possibly), politicians generally can’t do all that much to increase GDP growth, but they can do plenty to reduce it.

You want a quote?  Haven’t I written enough already???

numi Wrote:
——————————————————-
> Palantir Wrote:
> > In other words, how do we increase demand?
> Devaluing the dollar is an option.
>
> I’d be interested in hearing more about why you
> think this. On one hand, I can appreciate the fact
> that some inflation is good and devaluing the
> dollar could stimulate more job growth and
> production in the U.S. (versus outsourcing and
> exports). On the other hand, devaluing the dollar
> beyond what I believe has already been a
> devaluation through QE2 might only divert more
> capital away from the U.S.

I don’t think QE2 is a permanent devaluation, remember the bonds that the fed is buying, will eventually mature, and the money supply will contract to some extent. This is as opposed to the Fed “forgiving” the debt, which will permanently increase the money supply because it won’t be paid back.

However - basically my argument for devaluing the dollar is to trigger exports by making US goods/svcs more competitive. It is difficult to see how we can try to keep a strong dollar with our trade deficit.

Simply put, I see two ways of increasing demand - trigger more exports via devaluing the dollar, or ramping up government spending.

seemorr Wrote:
——————————————————-
> 1) I disagree that the “real problem” is
> entitlements … the real problem is the cost of
> health care. We wouldn’t be having this
> conversation if the cost of health care
> entitlements weren’t rocketing into unfathomable
> territory. Even if we de-entitle health care,
> those costs will continue to grow and still be
> borne by someone, either by states or individuals
> or, in many cases, people just not getting
> treatment.

Agree that one of the problems is the rising cost of care, but entitlements are the big issue. They are sucking up the lion’s share of funding, yet not yielding the benefits. There are a number of reasons why this is increasing, but it all boils down to that we just cannot afford to give everyone the next breakthrough treatment; hence an entitlement issue.

> 2) I also disagree that the Republicans have been
> concerned with deficits. Republicans have been
> concerned with taxes, and there’s a huge
> difference. Every step of the way, no matter the
> fiscal situation, their solution is always just to
> cut taxes. That has actually increased the deficit
> dramatically. The party is transparently fighting
> for the special interest of the moneyed class.
> Even if we grant the free-market orthodoxy that
> they pretend to espouse, their opposition to
> reforming exemptions, subsidies, and deductions in
> the tax code proves to me that they’re concerned
> not with deficits but with the consolidation of
> wealth.

You could say a similar thing about Dems: “tax and spend” and cut defense spending. They also transparently support corrupt unions that siphon off billions in tax payer dollars that often add little benefit.

> In short, if I have to choose who’s right I choose
> the Democrats, not because they’re actually right
> but because their position is far less scary.

This is where I may find some common ground with you in that you are picking the least worst option (I’d choose the Repubs), but I guess we both agree that the options just suck.

> Agree that one of the problems is the rising cost
> of care, but entitlements are the big issue. They
> are sucking up the lion’s share of funding, yet
> not yielding the benefits. There are a number of
> reasons why this is increasing, but it all boils
> down to that we just cannot afford to give
> everyone the next breakthrough treatment; hence an
> entitlement issue.

While I believe everyone should have access to the best of the best, I realize in a capitalist society it is not possible. However there are a lot of ways to tackle the healthcare cost which is without question the biggest liability we face as a nation. But there are creative ways to tackle this issue if people just stepped back and thought about things logically. For example how does it make sense to give giant subsidies to the corn industry which drives down the cost of soda and other junk food which makes people more unhealthy and drive up healthcare costs in the long run. Why not use that money to educate people about proper diet and encourage farmers to grow more fruits and vegetables, which are way too expensive compared to mcdonald’s, kfc and the like.

CFABLACKBELT Wrote:
——————————————————-
> but I guess we both agree
> that the options just suck.

Oh well. Who is John Galt?

And while we are comforting ourselves with the simplistic notion that entitlements are the evil -lets take a crack at the defense and state dept budgets and our self appointed role at world cop and big brother - the world is changing around us and we have failed to change and re-prioritize. These outlays and the excess unneeded spending buried within them is where the money is at.

And I agree that neither party platform solves the problem in front of us - each one is so wedded to its constituencies (not voters - but influence peddlers) that rationality and compromise is beginning to get very difficult to accomplish. The “two party” process has become somewhat dysfunctional but it is so deeply imbedded in our political power circles that it has become the only tool available to us.

Fixing healthcare isn’t really that difficult. The political will does not exist to make any changes.

One option is to go full blown public, i.e., “Medicare for all”.

The other option involves a few steps:
Step 1 - Repeal the Mccarran-Ferguson Act
Step 2 - Remove the barriers to interstate insurance competition. Allow insurance firms to compete across state lines.
Step 3 - Remove tax benefits for employer provided healthcare and force customers to shop around and purchase their own healthcare.

That’s pretty much it. Right now the system we have is neither capitalist, nor socialist, but a combination of the worst aspects of both.

We know how to fix the majority of our problems. Politics is what we don’t know how to fix and that is what gets in the way of everything.

Appropriate John Galt reference.

The problem with everything in America right now is basically the middle manning of everything. I think more people could afford healthcare if doctor’s didn’t have to take out $20 million insurance policies. While I’m not going to say that you do not have the right to sue a doctor who performed a poor procedure and resulted in the death/injury of a relative the compensation is sometimes out of hand. Instead of using that moment as a get rich quick time, the doctor should be disallowed from practice. This would monetarily hurt that doctor much more than any fine, because now he cannot practice. Let’s hope that would make them all be on point. What’s worse is most of the money from these cases go to the lawyer’s not even the victims.

I agree with the ‘world police’ problem. We do not need to be everywhere, but we CANNOT be nowhere. I think we need to pick our spots to be influential. Right now China is buying up all influence in the West. In my opinion we should be working much more closley with SA than we do. These are the nations we should be helping, our neighbors. I really would love to see a developed Africa too. I think that our money would be better spent helping those nations develop/forming long lasting ties.

I think tax cuts are the answer, not spending. The government spends money on too many organizations that do the same thing. I forget the exact facts, but it was something like 90 sponsored government agencies that promote education. Or 20 that work on eating nutritious. And many more cases of similar nonsense. The problem is politicans all get in to power on favors from people, so when it’s their time they have to repay them. Here’s a cushy job, you can promote “_________.”

“Tax cuts are just to protect the rich.” - Some idiot. The middle class is really who is losing out in America. The upper class has enough to live and the lower class don’t pay taxes. America’s middle class is falling apart. Just look around your neighborhood. I think that inheritence should be taxed, but not at marginal rate at an amount similar to long term capital gains. A tax that could be cut… SHORT TERM CAPITAL GAINS. Encourage people to play the market! Get money to businesses so they can expand their operations and hire more people. Unemployment is nuts right now. The numbers are distorted because of people who got discouraged looking altogether.

But my biggest peeve is career politicians. I honestly don’t believe people should be groomed for politics. I think we would do much better as a nation if we had ‘regular’ people. By regular I don’t mean any guy who watches football and drinks beer. But I do mean Americans who have demonstrated their intelligence and hard work in other arenas. Warren Buffet, Bill Gates, Steve Jobs and other great minds. People who can build things from nothing, innovate, brand things well, analyze and communicate. These people are already established, but could chose to help.

I could rant about welfare and all those other ‘entitlements’ you guys are discussing, and it is a problem, but I just don’t see the point right now. Politicans will dangle some trinkets infront of a block of American voters so they can have their moment in the sun. They just want in and are buying the voters.

I would love to see more focus in America go toward education. And by this I do not mean giving money to the teachers union. I think teachers shouldn’t be tenured. It promotes laziness. We all know HS teachers who should have been kicked out of there. Teachers should be paid more. It seems like we dismiss. “Those who cannot do, teach.” But if you offered competitive salary combined with the great benefits of teaching (summers off) you would see A LOT of brighter people doing it.

It’s much easier to govern your way into a recession than out of one.

Honestly, the best thing the government could do is carpet bomb vacant homes. Outside of that, look for continued destruction of the USD, high unemployment, and stagnant wages.