When Politics Trumps Economics

The sad reality of the current economic environment is that politics has trumped good economics.  It seems like the only time we can really be forced to put our ideologies aside and get something done is when the world is falling apart.  And ever since 2008 policy has been woefully lacking.

As Paul Krugman notes this morning, we now know for a fact that the deficit in this environment didn’t cause high interest rates, high inflation or really any of the negative side effects that many predicted.  So we were left with a central bank acting as an independent body implementing policy without having to jump through the political hoops of Congressional approval.  And we now know that QE didn’t get us back to full employment, close the output gap or do much of anything aside from making rich people a lot richer via the “wealth effect”.

Yes, it’s true – as I’ve noted repeatedly, the economy is doing better than it gets credit for.  But we could be doing a lot better.  And if we’d had policies more geared towards the household sector (like middle class tax cuts) and fixing what I repeatedly said was the real problem – the bankrupt middle class – then I think we’d be much better off than we are.  But we’re muddling along and underperforming our potential because we’ve decided that political fearmongering is more important than actually helping people.  So I guess we’ll have to let the Fed continue to try to prop this ship up all because we’re afraid that budget deficits cause hyperinflation and high interest rates.

It’s a sad state of affairs and I only hope that it doesn’t take another big collapse in the economy to get politicians to start making decisions that help those who need it most.