It’s early morning in Sweden right now, and I keep thinking I’m crazy for staying up just to watch a debate and then stay up even longer to analyse it.
Anyway, I’m going to keep this short (which is what I always think before I end up writing 2000 words).
The political consequences are going to be analysed by anyone and everyone, so instead I’m going to focus on my favourite area: The economy.
Today’s loser, from an economic perspective, is Tim Pawlenty. 5 % growth? For 10 years? And he is supposed to be the serious guy who can take on Romney? I mean, I had heard his 5 % growth thing before, but I assumed it was a metaphor and that he was going to clearify that tonight and tone it down. Instead, he repeated it. It’s pathetic to scream at the TV, but even more so scream at the computer at 3 AM in the morning.
Does he believe it himself? He cannot find an economist who believes that. 5 % growth is possible in a poor country that trades with rich countries (China being the most recent example). They can grow really fast until they reach the output level of the rich country, after which they start to grow at the same rate as the other rich countries. And no, this will not make the rich country poor (but that’s another topic).
Yes, I know it happened after World War II, but that’s because after World War II, americans had a lot of saved money that they hadn’t been able to spend during the war years due to rationing. Does Governor Pawlenty intend to re-introduce rationing during his first term, so he can create 5 % growth in his second?
Another reason for the postwar boom was the fact that the US lacked competitors in a lot of industries. See, all your competitors had been bombed. Does governor Pawlenty intend to nuke Hiroshima again? These are important questions he needs to answer.
Or, he can just admit his mistake and recognize the economic reality: It’s unlikely that the US can ever grow at more than 2 % in the long run. Sure, I know our economic models aren’t perfect, but that they would be off by that much I see as highly unlikely. Of course, if Americans were to start to save as much as they ought to save (approx. 40 % of their income), that could cause a boom in investment which would lead to higher growth – but only temporarily. Also, in the short run, increasing the savings rate typically doesn’t help the economy.
I simply cannot understand how a smart politician, surrounded by dozens of advisors, can fall into the trap of setting a goal for growth. The growth rate isn’t set by congress, it’s a function of a million factors. Even if Pawlenty gets elected and does everything right, a eurozone collapse or a slowdown of the Chinese economy can still destroy any chance the US has of recovery. What Pawlenty is doing is handing the 2016 election to the democrats on a silver plate. I can see the attack ads on how he lied about 5 % growth in front of me. Setting expectations too high is what democrats do, and it ends up hurting the economy. A president promising 5 % growth can only have two possible effects: 1) Investors believe him, and they’ll start to build houses and produce luxury goods (which are in high demand during booms) like never before, believing that since the economy will be growing at 5 % a year, there will definitely be a demand. When the demand isn’t there (and it won’t be, since the economy can’t grow at 5 %), the economy crashes and all those businesses will be standing there with goods they can’t sell. or 2) Investors do not believe the President, instead they draw the conclusion that he is clueless about economics and stops listening to him. They lose whatever confidence they had in the american economy when they realize the american people have once again elected a President who lacks a basic understanding of macroeconomics and growth theory. Kind of like how they lost trust in Obama after he kept talking about recovery summers which in the end only existed in his imagination.
I personally liked Santorum the best. He pointed out the obvious; that the debt ceiling had to be raised and that you can’t cut 42 % of the government spending overnight. Stating the obvious typically isn’t a merit, but when no-one else does, it makes you stand out. We need to from emotional conservatism to rational conservatism. It feels good, emotionally speaking, to say “Let’s not raise the debt ceiling! Balance the budget now! And send Obama back to Kenya!” but once you’ve calmed down and you think about it in strict, rational terms, you realize it’s unreachable. Makes for a good slogan, perhaps, but the seriousness of the fiscal crisis calls for more than just good slogans. I’d love it if anyone who doesn’t believe that raising the debt ceiling was the right thing given the current situation (which of course is very regrettable) could offer a real alternative: Where is the money going to come from, the money that goes into medicare, medicaid, social security, defense and everything else? Is it all just going to disappear over night? And let me also point out, the US would have been downgraded even more if the debt ceiling had not been raised at all, as that would have increased the risk of default by a hundred times. Of course, the cuts should have been deeper, and of course they ought to cut more now and not just postpone everything to the future. I completely agree – but not raising the debt ceiling at all under any circumstances wasn’t even a realistic option.
Of the other candidates, Romney played very safe, didn’t say anything stupid but also didn’t have any really memorable lines. He didn’t need to, already being the frontrunner. I have to say my opinion of Romney has become more favorable the past months, but I’m not ready to support him for the GOP nomination (though I will support him if he’s the nominee). I’m still sort of hoping that Huckabee will jump back in. I am confident that he would have swept the floor with all these candidates.
Paul had some good points, and I got huge respect for the Austrian School of Economics. As I’ve mentioned earlier, I first got interested in economics when I read Mises, Hayek, Reisman and the others. Still, Austrian economists of today seems to be too focused on bringing back the 19th century rather than developing solutions for today’s world.
Pawlenty lost tonight’s debate. Who else won or lost is hard to determine; we won’t really know until we get the results on saturday. But Pawlenty lost, and he now has put himself into more trouble than he can ever imagine. This debate, and every other time he’s ever mentioned 5 % growth, will come back and haunt him maybe for the rest of his political career.
And that’s a shame. Because Tim Pawlenty is an experienced governor with a lot of great qualities we could use in the White House, but having such an unrealistic goal hanging around his neck will make him much less efficient as a President.
That’s it for tonight. I realize a lot of people are going to disagree with me on this, and you’re welcome to leave comments and I’ll respond as soon as I can.
Thanks for reading.