Standard & Poors, one of several credit rating agencies, has downgraded the United States’ credit rating from the absolute best AAA rating to AA+, despite Congress passing a debt deal. But what really happened here?
There have been two economic debates happening behind the scenes during this entire process, as Republicans and Democrats come face-to-face with the realities of the economic games they’ve been playing. I say “behind the scenes,” because largely, the debates over the debt ceiling have used terms like ‘fiscal responsibility,’ and ‘revenue increases,’ that are talking points that cover the (more complicated) real policies.
First, the Republicans have had to deal with a growing constituency within their ranks who are articulate objectors to Keynesian economics. These people have always existed within the ranks of Republicans, because they have had nowhere else to go (Libertarian Party, anyone?) but the rise of the TEA Party has coalesced, emboldened, and educated this group, and they have made huge gains among fiscal conservatives who were already open to these arguments. For a lighthearted, entertaining, but accurate 10-minute education on the economics, click here. It’s also worth posting the follow-up video they made, about the current debt situation.
The political winds since President Obama took office have meant that conservatives who usually fall in line with monetarism have had access to new rhetorical ammo they previously wouldn’t touch, and they have been using it. Criticisms of Timothy Geithner and Ben Bernanke’s monetary policy can be traced very quickly to statements by Ron Paul and others who criticize the Federal Reserve’s existence. Republicans have a fight brewing between these re-branded conservatives and the moderates who want spending to go from 25% of GDP to 19% or so. Both have a case to make, but are mutually exclusive, which is why Republican candidates will not be having this argument publically. The schism could have radical consequences within the Party if it does.
Democrats are in an even worse predicament because of the downgrade, because a large and, for a long time, growing wing of the party has been saying that “Debts don’t matter.” Clearly, credit rating agencies disagree. This form of bastardized Keynesianism is something that Keynes himself wouldn’t endorse, a radical simplification of a nuanced theory by daft politicals. Part of the reason that Hayek followers have made such headway is the cartoon version of economic policy that so many of the Left have signed up for.
Real Keynesianism would have government acting as a counter-weight in the boom-and-bust economic cycle, making money more available in hard times, and less available when the economy is getting too optimistic. The re-election demands of politics however, mean that no congressman or congresswoman will ever actually vote for decreasing the economy or saving money/reducing debt in good times. The political attack ads are pre-written for this: “But Mr. So-and-so has voted against sensible legislation to help our kids, leaving our economy worse off. Tell So-and-so to go to Hell this November.”
So Democrats talk about responsible (Keynesian) policy, while voting for more, ever more stimulus and Republicans talk about “fiscal sanity,” but just make sure they vote for military spending during the boom, which is justifiable spending with their constituents. Economists are a tiny voting bloc, after all. But the country must still be governed.
So where do we go?
Progressives in the Democrat Party are serious that they want more stimulus, and angry that Obama has given away the farm, so to speak, while Ron Paul supporters are incensed that the debt ceiling was increased at all, giving away the farm in their eyes. The middle is seen as squishy and spineless by both sides. These two economic theories are irreconcilable in negotiations; they must be dealt with by economists.
Politicians cannot solve this problem.
I recommend economic education for Americans, for two reasons. First, when wide exposure is made within a group, the talented people are found. Most people out of Oklahoma who can play football, know they can play football. Most people in Alaska, not so much. If everyone gets exposure to this key need, we will find the cream of the crop, and down the road have the ideas needed to articulate solid theory. Secondly, the interaction of ideas improves those ideas, and when a critical mass of people talk about an issue, the “national conversation” is elevated and real solutions can found, and good decisions can be made.
Secondly, we should let the political shake-ups happen. The current alliances in politics has produced a piss-poor dichotomy that has left many Americans in the cold, not really identifying with either party. I’m not advocating third parties, but rather the re-alignment of coalitions within the parties. Both sides will be pushing for the other side to break up, and trying to conserve their own Party, but both know the triggers, or fault lines, and can likely run candidates and release platforms that tear at the fabric of their political opponents. Unions should consider endorsing Republican candidates, Pro-life Christians should look at Democrats, and everyone should avoid Ron Paul.
May God Bless America.