Unlike cocktails, the best economies aren't made by muddling. Image by TheogeoWe have grown accustomed to rival constituencies focusing on economic issues with special relevance to them: conservatives want lower taxes, libertarians want smaller government and liberals want better services.  The relative merits of each position wax and wane in the public eye and everyone wins or loses at the margin.  However, our current departure from "normal economic conditions" should remind everyone that these partisan concerns are of secondary importance: allowing greater human flourishing and the prevention of extreme human deprivation are the ultimate ends of all policy preferences.  Conservatives and libertarians favor lower taxes because they believe that low taxes spur growth and allow more people to better their lives.  That low taxes might be a good thing in and of themselves has eventually become ideological dogma, but only because we lacked a sufficiently compelling reason to raise taxes.  While it generally isn't expressed in such utilitarian terms, we all believe we have the best policies to create the most happiness.

The craziest part is that right now, still suffering from historically high unemployment, mass idle productive capacity and fresh concern that growth may falter, we aren't trying anyone's idea on how to grow an economy!  Instead we have resorted to a muddle of what is possible when liberals are scared and Republicans are obstructionist.

A Mojito Made with Tequilla, Basil, Root Beer and and Orange Isn't a Mojito

I know that conservatives would object that I'm letting liberalism off the hook since Democrats control Congress and the White House, but liberals from Yglesias to Krugman to Obama himself are begging for more stimulus while expecting the opposite.  Most liberals are terrified that the bad economy is going to strangle the Obama Presidency in its cradle, even though it didn't start on his watch.  When people raging on and on about "failed Obama economic policy," it must be pointed out he has something else in mind.  The stimulus package back in 2009 was far less than liberals wanted and largely undermined by state and local governments cutting spending to balance budgets during the recession.  Now, any fresh stimulus apparently has to be deficit neutral, which is to say non-Keynesian and non-stimulative.  I'm not saying you ignore the fact that Democrats haven't done a good job of getting us out of this recession, but liberalism has better ideas than this for growing an economy. We could take Medicaid away from the states freeing up state money for jobs and infrastructure, give a payroll tax credits for any employer who hires new employees or, preferably, just give people jobs where they do things that need to get done and pay for it with record low interest rates on government debt!  To those of you who worry about the deficit- which I hope is everyone- remember that the second half of Keynesian economics is that when the economy is growing again the government runs surpluses to keep things from overheating; see the end of the Clinton Presidency for a perfect example of responsible fiscal stewardship.

Economic conservatives, traditionally opposed to Keynesian economics, have long embraced monetary policy to manage recessions.  By expanding and contracting the monetary supply the economy is kept from freezing or overheating- like a central AC that kicks in when temperatures go too far in either direction.  Unlike fiscal policy, which requires that the government spends lots of money, monetary policy is managed entirely by the Federal Reserve.  Ideally, the feds- as opposed to the Fed- just run a balanced budget all of the time and let the prime interest rate smooth out the bumps in the business cycle.  In reality the federal government almost never runs a balanced budget and some bumps just don't want to be smoothed.  At this point, with record deficits, the federal funds interest rate sitting on the zero bound and 9.5% unemployment, I think the limits of monetary policy are pretty apparent.  What exactly do you do when monetary policy isn't enough? Even worse though, is that the Federal Reserve seems perfectly content with 9.5% unemployment and near zero inflation.  The Fed has a dual mandate of aiming for full employment and price stability, but you don't have to be a conspiracy theorist to feel they secretly prioritize one mutually exclusive objective over the other.  A big reason why conservatives prefer monetary stimulus, is that when it is working properly there is no need for fiscal stimulus (it should be pointed out that Keynes developed fiscal stimulus theories as an antidote to price controls and other government invasions into the free market, including the biggest one of all,  Communism).  So Tea-partiers and University of Chicago Conservatives who hate fiscal stimulus, advocate for a recession policy where the Federal Reserve targets a higher rate than 2% (something the IMF advocated), and worry about going under that target as much as going over.  We aren't trying to get the price level back up to its historical trend, but we should. 

Now, monetary policy is for a pretty sophisticated (and older) type of Conservativism.  Most of the heat in Conservative recession policy these days is focused on psychological stimulus.  That sounds pejorative, but the idea now known as "entrepreneurship" was first called "animal spirits" (by John Maynard Keynes, naturally) to denote just how mysterious they were.  So Conservatives believe that all this government spending is actually counterproductive for entrepreneurs (and their animal spirits) because instead of planning for how to grow their business they see a government that is spending so much that it will have raise taxes later.  This idea, fully explained as Ricardian equivalence, explains that fiscal stimulus doesn't work because people save rather than spend to offset expected future tax increases.  I'm not a Conservative and the idea doesn't make any sense to me (Don't savings fund investments or are we talking about money in mattresses type of savings?  Wouldn't low taxes now create an incentive to invest or spend now before later tax increases make it less profitable?), but with record deficits spent mostly on automatic stabilizers and tax breaks suffice to say we aren't heading the advice of Professor Ricardo either.  Taxes are historically low now, the deficit is sky high and every indication is that taxes will have to go up in the near future.  Because the tax system in this country is so complicated, I don't know why businesses would expect all of the increases to come out of their bottom lines but government revenues will have to increase. 

Finally, Libertarians believe that the economy is self regulating and these boom and bust cycles are fueled by the very interventions that try to cure them.  When the Fed tries to micro-manage the economy through the prime rate they actually make the eventual correction in the regular business cycle more pronounced and violent.  When the government intervenes in the market to fix rules and regulations it thinks are under-performing and performing "incorrectly" it is impossible to foresee all of the consequences of its actions.  Thus, our current recession was caused by massive inflation in the housing market due to Fed artificially keeping interests low and federal guarantees on housing through Fannie Mae and Freddie Mac.  This call for humility in the face of uncertainty should also include the well-intentioned federal deregulation that led to over-leveraged banks, huge derivitive risk and eventually financial crisis.  Austrian economics fans probably aren't happy that the federal government continues to, unsuccessfully, prop up the housing market through tax incentives for home buying.  I would happily embrace the federal government picking less winners and losers in the market, if it was accompanied by real oversight of private market manipulation and risk.  Perhaps the financial reform bill did the latter, but hardly to the adulation of libertarians.

Garnish and Serve

The current recession points and taking the scenic route to maximizing utility is not always possible.  Every ideology believes that they actually advocate for the policies that make life best, and I concede that no one has a monopoly on good ideas, but I am horrified to see that special circumstances have not prompted a reevaluation of priorities.  Strong families, low taxes, balanced budgets, good services, strong defense and limited government are all means to an end; to confuse the means with the end dehumanizes policy turning it into a giant board game for egoist nerds.  When faced with a choice between making sure that everyone has enough to eat and negligible deficit reduction, there is no choice!  In the long run, the deficit must be reduced because otherwise it will eventually constrain government spending on important services, like making sure that everyone gets enough to eat.  There are so many far targets for balancing the budget- but they have powerful interests to protect them- so why do we have to fund free lunch expansion at the cost of food stamps instead of say farm subsidies?  We dither about funding to shore up state budget cuts, meanwhile police get laid off, streetlights turned off and civilization slowly retreats.

This is the symptom of policy made without strategy, just lurching and shuddering towards nothing but public distain.  I might like Hyman Minsky's approach to getting out of a depression while you prefer Fredrick Hayek's or Milton Friedman's, but either way we can agree that the people guiding the country out of the ditch should actually have an overarching plan.  Politics is the art of the possible, not the art of making everything seem impossible to diminish expectations and deflect blame.  Here's how you make a drink and a recovery: follow the recipe, even when it's hard to do, and then if you don't like how it tastes afterwards at least you know where fault lies.