Wednesday, October 31, 2012

The election is approaching!

With just a few days to go before the presidential election on November 6th, it seems relevant and timely to critically examine economic and financial policy issues.  My goal is not to sway your vote one way or the other, but rather to dispassionately consider policy challenges that will confront the winner of the presidential race.

From my perspective, generating high and sustained economic growth is the most paramount issue facing the country.  Presidents, like quarterbacks, probably get too much credit when things are going well and too much blame when times are tough.  No president in a free-market democracy can mandate or command the economy to grow.  Effective fiscal and monetary policies are more nuanced.

Modern economic theory supports the notion that government can and should act to attempt to stimulate aggregate demand in times of recession or weak economic growth.  The looming “fiscal cliff” or budget sequestration is very disconcerting to many.  Tax increases and/or federal spending austerity are not the correct short-run policies for a feeble economy with high unemployment.  Without question, this issue will be job #1 for the winner of the election.

The level of the federal deficit and national debt must be addressed during the course of the next four years.  Research economists who examined debt and gross domestic product (GDP) data from many countries have concluded that a debt-to-GDP ratio exceeding 80% can stifle future economic growth, increase unemployment and cripple the federal budget as a result of the high cost of interest to service the debt.  Our current debt-to-GDP ratio in the United States is 105%.

Strong economic growth would help alleviate some of the pressure on the federal budget.  The oft-used cliché that “a rising tide lifts all boats” is applicable here.  Economic growth lowers the debt-to-GDP ratio, decreases unemployment and helps make servicing the national debt more manageable.

Economic growth, as measured by real growth in GDP, has exceeded the long-term average of 3% only two quarters out of the past 12.  This weakness, along with political and policy uncertainty, has caused business investment to stall and the banking system to be uncharacteristically risk averse, particularly harming the job creation machine of small business that has suffered under tight credit conditions.

Whoever wins the presidency will face important policy-making decisions to address our sub-par economy.  Legislating incentives, such as tax reformation, will generate better economic growth, increase employment and reduce uncertainty.  Exercise your right to vote!
 
Dr. Jason T. White
Principal / Chief Advisor for Research & Economics

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