Running the Economy on Adrenaline

So we get the news that the economy has added new jobs. To celebrate, there is a stock selloff? Fear of inflation through wage pressure is not the issue. We know that incredibly low unemployment and wage increases for low-income workers in the late 1990s was accompanied by, of all things, deflation. The sources of the recent uptick in inflation can be traced to the effect of surging energy prices and the price of raw materials, such as steel, that China is demanding at ever-increasing rates. Not to mention the falling dollar making all imports more expensive. Inflation does not seem to be the boogeyman now -- the fear rather is that an improving economy means higher interest rates. The intuition in a stock selloff is that higher interest rates will be worse for major corporations than the benefits indicated by the other good economic news.

What's going on here? Why is the good news not so good?

We can't solve the whole economy in one post, but a few things seem clear.
Federal tax breaks for corporations have turned out not to be a great success. The falloff in federal tax dollars has left states and localities to take up the slack with tax hikes and service cuts. This burden falls more heavily on small business than big businesses who often negotiate with cities to avoid tax burdens in turn for relocating. Service cuts hurt local economies in so many ways, not the least of which is cutting the income of small businesses that handle construction, maintenance, and the like. We would be out of this recession faster if the federal government had used deficit spending to invest in capital projects. Instead, the deficit spending has been dumped down a hole in Iraq. We are literally blowing up our tax dollars. While defense spending has some positive impacts through the defense industry, the bigger pain is the loss of reservists (and their purchasing power) from small communities which are the same ones hit by the service cuts and tax increases. Worse still, the deficit adds to the likelihood that interest rates will rise. Rising energy costs, health care, and tuition are taking away middle class purchasing power and reversing the real gains in living standards. Cheap money is the only thing making this economy bearable for the middle class - through low-interest credit cards and home equity loans, we are borrowing to stave off bankruptcy. No wonder the stock market plummets on news that that well might run dry.

Thus, the fundamentals of economic recovery are not here. In 1993, the Democrats committed the country to reduced deficits through a combination of federal spending cuts (on defense and social programs, both of which are ineffective GNP stimulators) and progressive taxation. The Republican Congress in 1994 was even more committed to the goal of a balanced budget. With this consensus in Washington on getting the federal house in order, the stage was set for real confidence in long-term investments. The internet boom of the 1990s was played out on this platform. You could argue that tax hikes caused the boom, but that would be as foolish as the Republicans arguing that tax cuts will jump start the economy.

What is needed is one thing: stability. A return to normalcy. Instead we're making up wars, devaluing the dollar, terrifying the public with multicolor alert systems, and gutting the core investment in roads, bridges, schools, and such. The Republicans are trying to run this economy on adrenaline. It's a cowboy mentality. Reversing the recent tax cuts will be a good step in telling corporate America that they can't wait for government giveaways to make their bottom lines. There's no quick fix, be it Iraq or tax cuts. John Kerry must run on a platform of financial discipline, fixing the spiraling health care, tuition, and energy costs, and international stability.